Building a bridge between MoH & MoF for tobacco taxes · Building a bridge between Ministry of...
Transcript of Building a bridge between MoH & MoF for tobacco taxes · Building a bridge between Ministry of...
Building a bridge between Ministry of Health (MoH) & Ministry of Finance (MoF) for tobacco taxes
Ayda A. Yurekli, PhD Coordinator Tobacco Control Economics Tobacco Free Initiative WHO
Asian Focal Points for Tobacco Control Meeting, Bangkok, September 5, 2011
Tax tobacco products Promote public health
"The Parties recognize that
price and tax measures are an effective and important means of reducing tobacco consumption by various segments of the population, in particular young persons.”
(WHO Framework Convention on Tobacco Control, Article 6)
Health effects of tax & price increases
Tax and price increases Induce current users to try to quit
Keep former users from restarting
Prevent potential users from starting
Reduce consumption among those who
continue to use
Objectives of Public Health With respect to reducing consumption by tax policy
1. Retail price increases via tax increases 2. Price gap among price bands reduces, so
that 1. Substitution from high to cheap cigarettes is
reduced 2. Expected reduction by quitting or reducing level
of consumption is achieved
Most Popular is often Mid Priced Brand
Retail prices of most popular, the cheapest and Marlboro brand in 2010
02468
101214
Austra
lia
Singap
ore
New Zea
landJa
pan
Malays
ia
Rep. K
orea
Brunei
D.
Mongo
lia
Viet N
amChin
a
Lao P
DR
Philipp
ines
Cambo
dia
Retail Price for Most Popular USD
Retail Price for the Cheapest USD
Retail Price for Marlboro USD
Source: WHO Report on the Global Tobacco Epidemic, 2011
Establishing communication channels with MoF for tobacco control & taxes
It is useful to understand The composition of price structure By price bands
Types of taxes and their impact on price Existing types of tobacco products in the market
and how they are treated in the tax system MoF's concerns with respect to tax increases &
earmarking Administration capacity of the tax officials How to claim the costs associated with Tobacco
Attributable diseases to health care system Smuggling problem
Structure of the price of a domestic cigarette
wholesale price (or ex-factory price)
RETAIL PRICE
TOTAL TAX
AD VALOREM EXCISE
retail margin
production costs
industry profit
wholesale margin
SPECIFIC EXCISE
producer price
VAT or SALES TAX
EXCISE TAX
Types of taxes imposed on tobacco products
• Excises • Specific based on quantity (e.g. $1.50 per pack
regardless of price)
• Ad-Valorem based on value (e.g. 45 percent of the manufacturer’s price)
• Hybrid taxes both specific and ad-valorem
• VAT or Sales Taxes • Customs Duty
It is essential to know how to impose types of excise taxes based on country situation
Especially which excise would help achieving higher revenues while reducing consumption
Pros & Cons of Types of Excises
Ad valorem Specific Higher prices Incentive to increase manufacturer’s price
No: Due to multiplier effect as part of any increase in the consumer price goes to the government as tax revenue.
Yes Any increase in price goes to manufacturer as revenue
Keeps up with inflation Better than specific.
No unless automatically adjusted by the inflation rate
Incentive to improve quality & variety of products
No due to multiplier effect Yes
Pros & Cons of Types of Excises
Ad valorem Specific Administration Difficult than specific
Easier to administer Good for weak administration
Easy to determine value No: Impose it on maximum retail price
Yes: requires a precise definition of what constitutes “one unit” of quantity.
Higher tax revenue no guarantee (inflation, price wars etc): minimum price may be required
Yes & also protects the revenues from price wars or reductions
Gives protection to domestic (cheaper) brands
Yes No, unless unified specific rate is levied
Specific Excise
Ad valorem excise
Ad valorem with specific floor
Mixed specific and ad valorem excise
Tax base Per unit of products (e.g., per 1000 )
The value of the products. The excise can be applied on the retail sales price, or the ex-factory price.
The excise is calculated on an ad valorem basis; however, if the calculated tax falls below a specified minimum floor, a specific tax rate applies.
Both ad valorem and specific excises are applied.
Administrative requirements
The tax should be collected at the point of manufacturing and on imports
Low as only the volume of the products has to be ascertained
The administrative burden can be high
The administrative burden can be high
The administrative burden is high as it requires assessing and collecting both ad valorem and specific excises.
Undervaluation
Not an issue. The excise regime is susceptible to undervaluation. This can be overcome by prescribing a minimum retail sales price.
This provides an easy tool to prevent the most blatant examples of undervaluation
The ad valorem part of the excise collections is susceptible to undervaluation.
Specific Excise Ad valorem excise Ad valorem with specific floor
Impact on product quality
Upgrading effect tend to reduce the relative tax on high quality products.
Multiplier effect provides a disincentive to costly quality improvement.
Impact on price
Tends to lead to higher prices, particularly for low-priced cigarettes.
Tends to lead to lower prices (price reductions will be “subsidized” if the multiplier effect is strong.
Tends to lead to higher prices for low-priced cigarettes.
Inflation The real value of the excise will be eroded unless adjusted in line with inflation.
The real value of the excise will be preserved as prices increase; at least, to the extent that tobacco prices follow inflation.
The real value of the specific floors will be eroded over time unless adjusted in line with inflation.
Health benefits
The tax will discourage the smoking of tobacco products irrespective of the price.
The tax may encourage “trading down” in favor of cheaper cigarettes; these potentially could have a worse health and revenue impact.
Existing tobacco products
Problems: Protectionism Many governments try to levy lower taxes by
differentiating taxes for other tobacco products Some gives tax exemption to a certain part of
production of other tobacco products Many faces huge tax avoidance that costs to tax
revenues. Best Practice: All tobacco products are equally harmful & should be treated equally in the tax system Poor can be supported better by tax revenues not by
tax rates
Concerns with the differential excise system
Public Health Concern Lead to other changes in tobacco use behavior &
undermines the full impact of higher taxes on consumption. substitution to cheaper products or brands
Revenue Concern Reduced expected revenue Changing market structure of brand share
Concerns for higher taxes
As consumption reduces, the revenues decreases – FALSE
As tax increases, smuggling increases Partly true But Level of smuggling cannot be explained
entirely by taxes.
Tax tobacco products Raise revenue
Efficient revenue generation Historically, the primary motive - still
true in many countries today Very efficient source of revenue given: Low share of tax in price in most countries Relatively inelastic demand for tobacco
products Few producers and few close substitutes,
in general
Not a strong link between higher prices/taxes and the level of smuggling
Arithmetic Means of % of Smuggling in 2009 & Retail Price for Most Popular Brands in 2010 by Income Group
$2.08 $0.95$1.04$5.65
26%13%16%11%
0%
5%
10%
15%
20%
25%
30%
35%
HI UMI LMI LI
% o
f sm
uggl
ed ci
gare
ttes i
n th
e m
arke
t
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
MPB
Retai
l Pric
e/pac
k USD
price USD % smuggling
Source: Estimated by Author by using WHO GTCR 2011 and Euromonitor data 2011
Government commitment is the key for tackling smuggling
Spain: Total sales, contraband and tax incidence
90.3
84.5
17.5%
1%
78%
59%
50
55
60
65
70
75
80
85
90
95
100
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Duty
pai
d sa
les
billi
on p
iece
s
0%
5%
10%
15%
20%
25%
% s
hare
of c
ontra
band
in d
uty
paid
sa
les
and
tota
l tax
sha
re in
reta
il pr
ice
Duty paid % of contraband Total tax incidence
Souce: Author's estimation by data from ERC 2010, Euromonitor 2011
Better Tax Practice: Malaysia
0
2
4
6
8
10
12
2004 2005 2006 2007 2008 2009 2010
Average retail price/pack Producer Price/packExcise tax/pack Total tax/pack
Source: Calculated by using data by Euromonitor 2011& TMA 2011
Has the smuggling been increasing in Malaysia? Why do manufacturers produce more than market can absorb?
Source: Estimated using Euromonitor data 2011
0
5000
10000
15000
20000
25000
30000
2005 2006 2007 2008 2009
Cons
umpt
ion
and
Lega
l Sal
es
-10%
-5%0%
5%
10%
15%20%
25%
30%35%
40%
Illic
it tra
de %
Consumption A (Production + Import - Export)Consumption B including illicit cigarettesLegal Sales% illicit (Consumption B - legal sales) % of illicit in (ConsumptionA - Consumption B)
Conclusion
MoH may lead to multi-sectoral collaboration in the government for tobacco control
Although revenue generation is the focus, MoF is also sensitive to public health concerns
Therefore, Reaching out MoF is the key for better tobacco tax
policy implementation Speaking MoF's language is important but it is equally important to understanding MoF's concerns
& constraints and finding solutions within the government