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Sunday, February 16, 2025
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Sunday, February 16, 2025

House approves bill on second reading to stabilize tax revenues, curb illicit cigarette trade

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The House of Representatives approved on second reading a bill aimed at rationalizing excise tax rates on tobacco and vapor products to halt declining excise tax collections over illicit trade.

Rep. Mikaela Angela Suansing of Nueva Ecija said that if enacted, the bill could lead to an “aggregate revenue recovery of P66 billion across five years.”

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Suansing said in her sponsorship of House Bill 11360 that while the 2013 Sin Tax Law initially succeeded in reducing smoking rates and generating additional revenue until 2021, excise tax revenue collections have since declined annually.

She said collections fell from P176 billion in 2021 to P160 billion in 2022 and further down to P135 billion in 2023. The total number of adult smokers also increased to 23.2 percent in 2023 from 18.5 percent in 2021, with the growing prevalence of illicit trade.

“Illicit cigarettes pose a serious threat to peace and order as they fund illegal activities,” Suansing said.

Deputy Speaker Rep. Kristine Singson-Meehan of Ilocos Sur, a co-sponsor of the bill, said “the increasing tax rate is no longer effective in reducing smoking rates.”

Citing a study by the Food and Nutrition Research Institute (FNRI), she said adult smoking prevalence rose and adolescent smoking prevalence doubled from 2.3 percent in 2021 to 4.8 percent in 2023.

She also pointed out that legal tobacco volume and revenue collections continue to “decline despite yearly tax increases,” while “illicit trade is continuing to increase.”

“More than 2 million Filipinos depend on tobacco for their livelihood. Declining government collections affect government revenue and reduce funding for national health programs and infrastructure development,” Meehan said.

Cagayan de Oro City Rep. Rufus Rodriguez, another co-sponsor of the bill, said the objectives of the Sin Tax Law, which are to raise government revenues and protect public health, have come under immense strain from illicit trade.

“I’m very much concerned because Mindanao is the first island so much affected by illicit trade,” said Rodriguez.

Rodriguez said the billions in lost revenues due to illicit trade have negatively impacted government funding for health programs under the Universal Health Care Law.

“To address this issue, it is imperative for the government to recalibrate its existing revenue measures and ensure our tax laws do not unduly incentivize, nor give premium to, illicit traders at the expense of legitimate businesses,” he said.

“While it is in the country’s legitimate interest to impose higher taxes on sin products, we need to be cognizant of its unintended consequences,” Suansing said.

Under the proposed measure, the tax rate will increase by 2 percent every even-numbered year starting Jan. 1, 2026, and by 4 percent every odd-numbered year starting Jan. 1, 2027.

The tax rate increases will continue until Dec. 31, 2035. As a safeguard against frontloading, the Department of Finance, in consultation with the Bureau of Internal Revenue, will set a reasonable threshold for removals.

The bill also grants the President the authority, upon the recommendation of the Secretary of Finance, to increase the tax rate to 5 percent if the actual national government deficit exceeds the programmed deficit equivalent to 2 percent of the gross domestic product of the previous year.

After a decade, a review of the tax’s impact on revenue collections, health costs and smoking prevalence will be conducted.

Rodriguez said the bill seeks to combat rampant misdeclaration of vapor products to evade taxes. “In vapor products, these unscrupulous producers misdeclare their kind of vapor product.”

He said some producers declare nicotine salt products as freebase nicotine, which has a lower tax rate under the current law, highlighting the necessity of imposing a unified tax rate on both types.

“Illicit traders capitalize on such regulatory gaps to evade higher taxes imposed on certain nicotine varieties, ultimately undermining public health efforts and fair market practices,” said Rodriguez.

If enacted, the measure will increase the current tax rates on vapes and heated tobacco products.

Vapor products containing any liquid substance, regardless of nicotine content, including nicotine-free liquids or similar products, whether classified as nicotine salt or freebase nicotine, will be subject to an increased and unified tax of P66.15 per milliliter, the same rate as a cigarette pack of 20 sticks.

Under the existing law, the tax rates for cigarettes, heated tobacco products and vapor products increase 5 percent annually.

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