The Philippine government may lose at least P60 billion in revenues this year amid the rampant illicit cigarette trade in the country, according to a congressional leader.
Rep. Joey Salceda, chairman of the House of Representatives’ ways and means committee, said the health cost due to smoking-related disease could go as high as P188 billion, if the current trend of rampant illicit trade persists.
In a media forum organized by the Sin Tax Coalition on Oct. 17, 2023, Salceda said illicit cigarettes are openly sold in stores and online marketplaces. He said his staff attempted to access fake cigarettes from online channels such as Lazada, Shopee and Facebook Marketplace, and were able to “succeed with unbelievable ease” at viewing and purchasing these illicit products.
He said platforms categorized them under misleading categories like “Asian Herbs” and “T-Shirts” which allowed them to see illicit cigarettes sold out in the open at prices less than half of their licit counterparts.
Salceda said among the cigarette brands sold are San Marino, Casablanca, Fort and Bravo on e-retailer platforms for as low as P350 per rim against what should be P800 per rim.
“In every segment of the market and in practically every venue for selling, illicit cigarettes are extremely easy to come by. There is no challenge to buying these brands and they sell for as low as 1/5 the price of licit cigarettes. The incentive to smuggle will persist as indexation continues to widen the gap between illicit and licit cigarette prices,” he said.
Illicit cigarette trade is also seen to contribute to higher smoking prevalence in the Philippines, he said.
“We should prepare ourselves to come up with a more innovative, dynamic counter moves against illicit trade because that is the bigger evil right now,” Salceda said in a media forum organized by the Sin Tax Coalition on Oct. 17, 2023.
“The revenue base will continue to shrink, and there is a chance that prevalence will start to increase especially now that [illicit cigarette] prices are low,” he said.
Salceda said the low prices of smuggled or counterfeit cigarettes encourage smokers, representing 23 percent of the population, to buy more sticks of cigarettes. “For better or for worse, our advocacy of higher taxes played a key role in making the illicit sector more attractive but that is because of our rent-seeking bureaucracy,” he said.
He said while excise tax collection fell, smoking prevalence in the Philippines remained high at 23 percent.
Salceda said, “removals of cigarettes from factories declined from 4.3 billion sticks in 2019 prior to the implementation of Republic Act 11346 to 3.2 billion in 2020. “
“Numbers from the World Bank also suggest that the decline in legal removals shouldn’t have been that high. Smoking prevalence only declined from 23.4 percent in 2019 to 23 percent in 2020,” he said.
“A decline of one billion sticks could not have been accounted for by an incidence decline of just 0.4 percentage point alone. Something else happened. It is more logical to suspect that illicit trade accounted for much of the decline in illicit removals,” he said.
He estimated that illicit cigarette sticks could have risen to around 2 billion in 2023.
Salceda said illicit trade also erodes government revenues.
“Until we resolve the issue of illicit trade of cigarettes to a significant degree, there will be a hesitation among the public to support further excise tax increases,” said Salceda.
Salceda said the enforcement and implementation of measures against illicit traders should be seriously considered before discussing tax increases. He said that if higher excise taxes would be imposed, illicit trade might be more widespread.
“Doing nothing against illicit trade is no longer an option. We need a marketing strategy. We need a price point where the key curve happens and therefore consumption collapses. We just have to make a certain consumer behavior study, basically at which point where differential becomes small and therefore enforcement becomes less important. So, there will be science-based approaches,” he said.
He said the study should focus on whether enforcement is lacking or there are other issues such the price structure at play. “Right now, I’m on the enforcement side,” he said.
Salceda said Filipinos themselves were behind the illicit cigarette factories in the country. “Foreigners have nothing to do with it. Most of them are factories inside Subic, the bulk of it,” he said, referring to fake stamps, rolling machines and other paraphernalia used for contraband operations housed in local warehouses.
He said that while revenue recovery helped mask the problem in 2021, “the 2022 figures stare us in the face with the problem becoming more undeniable,” he said.
Salceda expressed alarm over the 7.8-percent drop in cigarette excise tax collection from P173.9 billion in 2021 to P160.2 billion in 2022. This was the biggest decline since the enactment of the Sin Tax Reform law in 2012, which scheduled the tax increase on cigarettes and alcohol, he said.
“We also missed the 2022 target of P191 billion by a massive P31.2 billion,” he said.
“We must attack the problem in its complete form—in every stage of the value chain. That is why I am considering a comprehensive illicit trade bill that addresses everything from smuggling through the de minimis loophole and through our ecozones, to leakage of tobacco declared for export on transshipment to the manufacture of fake cigarettes. When complete, I will introduce this bill in the House,” Salceda said.
Action for Economic Reform representative Sofia Rodrigo agreed that, “we cannot dismiss the fact that higher taxes may at times encourage an increase in illicit trade.”
Rodrigo said illicit trade is “more a function of poor tax administration,” noting that ”illicit trade can be neutralized by good governance and good institutions.”
AER is a part of the Sin Tax Coalition which organized the event entitled “Defend Sin Taxes, Fight Illicit Trade: A Media Forum on Addressing Illicit Tobacco Trade in the Philippines”. The event was attended by government officials, health advocates and journalists on Oct. 17.