Illicit cigarette trade erodes government revenues and threatens to increase smoking prevalence in the Philippines from the present 23 percent, a leader of the House of Representatives said in a forum on Oct. 17, 2023.
“As a result of cheaper illicit alternative, this is a serious national crisis for me, having worked to bring down smoking prevalence down to 23 percent,” Rep. Joey Salceda, chairman of the House ways and means committee, said in a media forum organized by the Sin Tax Coalition.
Sin Tax Coalition held an event entitled “Defend Sin Taxes, Fight Illicit Trade: A Media Forum on Addressing Illicit Tobacco Trade in the Philippines” attended by government officials, health advocates and journalists on Oct. 17.
“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, “di lalo na tayo nagka-illicit.”
“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 underscored the need to curb illicit trade, allegedly perpetuated by local groups using ports and economic zones in the country. He said Filipinos are behind the illicit cigarette factories. “Foreigners have nothing to do with it. Karamihan nyan 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.
“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,” he said.
“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 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.
He said while excise tax collection fell, smoking prevalence in the Philippines remained high at 23 percent.
He 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 the government stands to lose at least P60 billion in revenues this year, while the health cost due to smoking-related disease will go as high as P188 billion, if the current trend of rampant illicit trade continues to persist in the country.
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. Walang kalaban-laban ang matino. The incentive to smuggle will persist as indexation continues to widen the gap between illicit and licit cigarette prices.,” 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.
In the same forum, Bureau of Internal Revenue (BIR) Commissioner Romeo Lumagui Jr. said the illicit tobacco trade likely reduced the Philippines’ gross domestic product (GDP) by an average of 0.39 percent and slashed employment by 4.9 percent between 2018 and 2022, based on a study by University of Asia and the Pacific and Federation of Philippine Industries Inc.
Lumagui estimated that the government would incur foregone revenues of P30.57 billion due to illicit cigarettes this year, up 16.7 percent from P26.19 billion in foregone revenues last year.
“This will also mark the fourth consecutive year that lost revenues have increased in volume,” Lumagui said.
He said foregone revenues were forecast to hit P33.7 billion by 2024, P36.8 billion by 2025, P39.8 billion by 2026 and P42.54 billion in 2027.
“To give an idea of the impact of these revenue losses on the country, just consider that the P26.19 billion in lost revenues in 2022 could have funded the construction of 57,000 socialized housing units, 8,642 classrooms and 75 hospitals,” he said.
“These figures highlight the fact that illicit trade has indeed grown dramatically, especially during the pandemic years, and have cost the Philippines many lost opportunities to uplift the quality of lives for millions of Filipinos,” said Lumagui.
Senator Sherwin Gatchalian, chairman of the Senate committee on ways and means, said that illicit trade in tobacco products extend beyond mere revenue loss.
“It has far-reaching consequences including damage to the agricultural sector, job losses, and non-compliance with legal regulations. It is imperative to combat illicit trade to protect government revenues. This matter requires a comprehensive and coordinated effort to mitigate its adverse effects on society,” he said.
“I have filed a resolution aimed at addressing the incidents of illicit trade involving excisable products to curb the revenue leakages. and continue to support the implementation of syntax reforms,” said Gatchalian.
For her part, Action for Economic Reform representative Sofia Rodrigo said, “We cannot dismiss the fact that higher taxes may at times encourage an increase in illicit trade.”
She said illicit trade is “more a function of poor tax administration,” adding that ”illicit trade can be neutralized by good governance and good institutions.”