Illicit cigarettes create ‘lose-lose situation’ for tax, health goals

Senator Sherwin Gatchalian Senate photo

MANILA, Philippines – Rising illicit cigarette trade has led the country to a “lose-lose situation” by drastically reducing government revenues and reversing public health gains, Senator Sherwin Gatchalian said on Thursday.

In a hearing of the Senate Ways and Means Committee, Committee Chairman Gatchalian said, “The reason we impose excise tax on tobacco products is so we can have better health outcomes. But smoking prevalence has now reversed. We’re now in a lose-lose situation because smoking prevalence is going up, tax collection is going down.”

A survey from the Food and Nutrition Research Institute (FNRI) revealed that the adult smoking prevalence in the country has increased from 19% in 2021 to a new high of 24.4% in 2023.

Tobacco excise tax collections have dropped from P176 billion in 2021 to P160 billion in 2022, P135 billion in 2023 and P130 billion in 2024.

READ: PH gov’t asked to recalibrate tobacco tax rate to prevent spread of illicit trade

“From the standpoint of this committee, revenue is going down, but smoking prevalence is going up, so where are the cigarettes coming from? 5% jump (in smoking prevalence) is quite big,” Gatchalian said.

During the hearing, Department of Finance (DOF) Director Atty. Nina Asuncion said the Finance Secretary has endorsed a measure filed in Congress proposing for a tobacco excise tax increase moratorium and the implementation of a track-and-trace system.

Gatchalian urged the DOF to “press the alarm button” as the quantity and value of illicit tobacco products seized during trade enforcements has risen.

“If we don’t focus our attention on this, we’ll end up with a scenario where illicit trade might be bigger than legal activities. We want to press on the DOF to take a look at this problem and give us solutions to curb this illicit trade,” he noted.

According to Bureau of Internal Revenue (BIR) Head Revenue Executive Assistant, Atty. Don Galera, excise taxes due in 2024 amounted to more than P64 million for illicit vapor products and more than P342 million for illicit cigarettes.

Philippine Tobacco Institute (PTI) President Jericho “Koko” Nograles assured the Senate that the industry has “committed” to increased excise tax collections if the proposed tax hike moratorium will be implemented, citing stabilization of prices and reduction of demand for smuggled tobacco.

PMFTC Inc. President Gijs de Best said in a prepared statement, “There should be a level playing field where all the industry participants are paying the right tax and complying with all laws and regulations.”

De Best requested the administration for consistent nationwide enforcement of all laws including the recently passed Anti-Agricultural Economic Sabotage Act followed through by prosecution of illicit traders in the proper courts; to implement the Minimum Retail Price for cigarettes; to address tax loopholes for vapor products; and to encourage international and regional government to government cooperation to stop the illicit trade supply chain.

Gatchalian said that according to his office’s estimates, the country will be losing P70 billion in taxes in the next 3 years due to the “intensity” of illicit trade.

“Aside from enforcement, we should think of other ways – maybe economic ways – to curb illicit trade,” the senator said. “Because of the huge incentives of the prices of illicit cigarettes versus legal cigarettes, we cannot take away the fact that criminals are being incentivized because of this huge arbitrage between illicit cigarettes and licit cigarettes.”