Ad valorem better than specific tax on cigarettes
Ad valorem better than specific tax on cigarettes
Updated 00:24am (Mla time) Oct 11, 2004
By Neal Cruz
Inquirer News Service
Editor's Note: Published on page A14 of the October 11, 2004 issue of the Philippine Daily Inquirer.
THE LEAST opposed tax measure is the proposed increase in the "sin" taxes (on cigarettes, liquor and the like). But the legislators can't agree on how to go about it. One group of congressmen wants to stick to the fixed specific tax; another wants the ad valorem tax, and a third, a combination of both.
For the past 20 years, Congress has been changing the tax system on "sin" products. From 1984 to 1986, it was specific tax plus ad valorem; from 1986 to 1996, it was ad valorem; and from 1996 to the present, it has been specific tax.
Why do members of Congress keep changing tax systems? Perhaps because whenever a new tax scheme is proposed in Congress, lobbyists with conflicting interests on the tax in question are very active in Congress, and you know what that means. And there are no more generous lobbyists than those representing the manufacturers of cigarettes and liquor.
What are these taxes? The specific tax is a fixed tax on every pack of cigarettes, regardless of retail cost. The proposed increase is a uniform P1 for the pack retailing at P13.44 and for the pack selling at 40 centavos. Thus, the high-priced cigarettes will be sold from the old P13.44 a pack to the new P14.44 per pack, an increase of 7 percent. The low-priced cigarette, on the other hand, will be sold from the original 40 centavos to P1.40 a pack, an increase of 250 percent.
If the increase is P2 per pack, the premium brand will sell at P15.44, an increase of only 15 percent. But the low-priced brand will sell at P2.40 a pack, or a whopping 500 percent increase. There are several tiers of prices for cigarettes, set in consideration of the smokers' different class levels and tastes. From 40 centavos a pack, the prices go up gradually to P1.12, P5.60, P8.96, to P13.44. But the percentage of increases go down proportionately from 250 percent, to 89 percent, to 18 percent, to 11 percent and to only 7 percent for the premium brand, respectively. If the increase is doubled to P2 per pack, the percentages are also doubled, from a high of 500 percent for the low-priced brand to a low of only 15 percent for the premium brand.
As you can see, an across-the-board increase, which is the specific tax, imposes disproportionate burdens on the different brands and their smokers.
The ad valorem tax, on the other hand, is a fixed percentage added to the price per pack. The higher the price, the bigger the tax, although the percentage remains the same for both the premium and the low-priced brands.
Not surprisingly, the competing manufacturers favor the tax most favorable to them. Philip Morris and La Suerte, which manufacture the premium foreign brands, favor the specific tax, while Fortune Tobacco, which manufactures the lower-priced local brands, favors the ad valorem.
Philip Morris and La Suerte say that under the ad valorem tax manufacturers can deflate their selling price to retailers so that they would pay less taxes. In the new ad valorem tax, however, the tax would be based on the retail prices per pack of each brand in selected outlets.
Fortune, on the other hand, says that the specific tax system results in the unequal sharing of the tax burden among the various brands of cigarettes. To illustrate, compare the tax imposed on two brands, Philip Morris and Hope, Fortune's highest-priced brand. The retail price of a pack of Philip Morris in 2003 was P22.31; it was taxed at P8.96 a pack. On the other hand, Hope cost only P17.81 and was taxed at the same rate-P8.96 a pack. The tax burden of Philip Morris, therefore, was only 40 percent while Hope was 50 percent.
Increasing the tax rate by P1 a pack will increase the tax burden of Hope to 56 percent while that of Philip Morris will rise to only 45 percent.
But if the tax burden is equalized by the ad valorem tax to 50 percent of the actual retail price, the tax on Philip Morris would be P11.22. The combined taxes of Hope and Philip Morris would be P20.18 or P2.26 (12.63 percent) more than their combined taxes under a specific tax scheme. For these two brands alone, had they been taxed in 2003 in proportion to their retail prices, the government could have collected P609 million more.
For the top 11 brands, (all are taxed under Republic Act 8240 at P8.96 per pack), the tax lost in 2003-had they been taxed in proportion to their retail prices-amounted to P1.74 billion!
Besides, Fortune says, that the ad valorem system is consistent with Sec. 28, paragraph 1 of Article VI of the Constitution, to wit: "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation."
Fortune maintains that the ad valorem system is a progressive tax measure where all products pay proportionately according to their actual retail prices.
For example, applying the 1996 ad valorem tax rates to the 2003 retail prices and volume sold by the 11 major brands, tax collection should have been P14.594 billion, or P2.670 billion more than what was actually collected. Including other brands, the industry's tax payments would have totaled P25.087 billion, or P5.615 billion more than the tax actually collected.
By the way, in 2003, Fortune Tobacco paid the biggest share in the industry total, more than P11 billion in taxes, or more than 56 percent of the total revenues collected by the government from the whole tobacco industry. The second biggest was paid by Philip Morris, more than P7.6 billion, or 38.8 percent of the total, while La Suerte paid only P630.1 million, or 3.20 percent.
The total tax collection in 2003 was P69.31 billion. Almost one-third or 28.42 percent of that came from the tobacco industry.
Updated 00:24am (Mla time) Oct 11, 2004
By Neal Cruz
Inquirer News Service
Editor's Note: Published on page A14 of the October 11, 2004 issue of the Philippine Daily Inquirer.
THE LEAST opposed tax measure is the proposed increase in the "sin" taxes (on cigarettes, liquor and the like). But the legislators can't agree on how to go about it. One group of congressmen wants to stick to the fixed specific tax; another wants the ad valorem tax, and a third, a combination of both.
For the past 20 years, Congress has been changing the tax system on "sin" products. From 1984 to 1986, it was specific tax plus ad valorem; from 1986 to 1996, it was ad valorem; and from 1996 to the present, it has been specific tax.
Why do members of Congress keep changing tax systems? Perhaps because whenever a new tax scheme is proposed in Congress, lobbyists with conflicting interests on the tax in question are very active in Congress, and you know what that means. And there are no more generous lobbyists than those representing the manufacturers of cigarettes and liquor.
What are these taxes? The specific tax is a fixed tax on every pack of cigarettes, regardless of retail cost. The proposed increase is a uniform P1 for the pack retailing at P13.44 and for the pack selling at 40 centavos. Thus, the high-priced cigarettes will be sold from the old P13.44 a pack to the new P14.44 per pack, an increase of 7 percent. The low-priced cigarette, on the other hand, will be sold from the original 40 centavos to P1.40 a pack, an increase of 250 percent.
If the increase is P2 per pack, the premium brand will sell at P15.44, an increase of only 15 percent. But the low-priced brand will sell at P2.40 a pack, or a whopping 500 percent increase. There are several tiers of prices for cigarettes, set in consideration of the smokers' different class levels and tastes. From 40 centavos a pack, the prices go up gradually to P1.12, P5.60, P8.96, to P13.44. But the percentage of increases go down proportionately from 250 percent, to 89 percent, to 18 percent, to 11 percent and to only 7 percent for the premium brand, respectively. If the increase is doubled to P2 per pack, the percentages are also doubled, from a high of 500 percent for the low-priced brand to a low of only 15 percent for the premium brand.
As you can see, an across-the-board increase, which is the specific tax, imposes disproportionate burdens on the different brands and their smokers.
The ad valorem tax, on the other hand, is a fixed percentage added to the price per pack. The higher the price, the bigger the tax, although the percentage remains the same for both the premium and the low-priced brands.
Not surprisingly, the competing manufacturers favor the tax most favorable to them. Philip Morris and La Suerte, which manufacture the premium foreign brands, favor the specific tax, while Fortune Tobacco, which manufactures the lower-priced local brands, favors the ad valorem.
Philip Morris and La Suerte say that under the ad valorem tax manufacturers can deflate their selling price to retailers so that they would pay less taxes. In the new ad valorem tax, however, the tax would be based on the retail prices per pack of each brand in selected outlets.
Fortune, on the other hand, says that the specific tax system results in the unequal sharing of the tax burden among the various brands of cigarettes. To illustrate, compare the tax imposed on two brands, Philip Morris and Hope, Fortune's highest-priced brand. The retail price of a pack of Philip Morris in 2003 was P22.31; it was taxed at P8.96 a pack. On the other hand, Hope cost only P17.81 and was taxed at the same rate-P8.96 a pack. The tax burden of Philip Morris, therefore, was only 40 percent while Hope was 50 percent.
Increasing the tax rate by P1 a pack will increase the tax burden of Hope to 56 percent while that of Philip Morris will rise to only 45 percent.
But if the tax burden is equalized by the ad valorem tax to 50 percent of the actual retail price, the tax on Philip Morris would be P11.22. The combined taxes of Hope and Philip Morris would be P20.18 or P2.26 (12.63 percent) more than their combined taxes under a specific tax scheme. For these two brands alone, had they been taxed in 2003 in proportion to their retail prices, the government could have collected P609 million more.
For the top 11 brands, (all are taxed under Republic Act 8240 at P8.96 per pack), the tax lost in 2003-had they been taxed in proportion to their retail prices-amounted to P1.74 billion!
Besides, Fortune says, that the ad valorem system is consistent with Sec. 28, paragraph 1 of Article VI of the Constitution, to wit: "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation."
Fortune maintains that the ad valorem system is a progressive tax measure where all products pay proportionately according to their actual retail prices.
For example, applying the 1996 ad valorem tax rates to the 2003 retail prices and volume sold by the 11 major brands, tax collection should have been P14.594 billion, or P2.670 billion more than what was actually collected. Including other brands, the industry's tax payments would have totaled P25.087 billion, or P5.615 billion more than the tax actually collected.
By the way, in 2003, Fortune Tobacco paid the biggest share in the industry total, more than P11 billion in taxes, or more than 56 percent of the total revenues collected by the government from the whole tobacco industry. The second biggest was paid by Philip Morris, more than P7.6 billion, or 38.8 percent of the total, while La Suerte paid only P630.1 million, or 3.20 percent.
The total tax collection in 2003 was P69.31 billion. Almost one-third or 28.42 percent of that came from the tobacco industry.
posted by Dante at 12:20 PM
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