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Tax increase goes up in smoke

The case for the mainland to do something about its smoking habit hardly needs restating. But we are prompted to do so by Beijing’s announcement of a derisory increase in the consumption tax on cigarettes which is highly likely to fail one of its justifications – to discourage smoking. The government has raised the wholesale tax on cigarettes from 5 per cent to 11 per cent. This may sound a lot, but it has had a featherweight impact on over-the-counter cigarette prices and sales, according to retailers in the capital. For example, a popular brand that used to cost 25 yuan (HK$32) a pack now costs 27 yuan. One retailer said his business had not suffered at all from the rise, indicating a zero deterrent effect.

The increase in the wholesale price is estimated to bring in an extra 20-billion-plus yuan in tax revenue this year compared with 2014, according to an informed source, although other experts put the figure much higher. In the absence of any significant deterrent effect on a dangerous habit that inflates national health-care costs, this is a socially questionable windfall for the state. There is an argument for socially “laundering” it by direct transfer to the national health budget. It would make even more sense, however, if the tax increase were also considerably larger. Since 2000, price inflation for cigarettes in the mainland has lagged rising incomes, and taxes account only for about 50 per cent of the retail price, compared with about 70 per cent in Hong Kong, up to 80 per cent in Europe and the World Health Organisation recommendation for China of at least 70 per cent.

The mainland has more than 300 million smokers. According to the WHO, about one million deaths a year can be attributed to tobacco use. In Hong Kong, a decade of regular tobacco-tax increases is credited with cutting the incidence of lung cancer after allowing for an ageing population.

That said, Beijing is to be commended for introducing, from next month, the nation’s toughest smoking bans yet since the first curbs on smoking in indoor venues in 2010. Weak enforcement has fostered defiance in eating places. Fines will now be 20 times higher at 200 yuan and the ban is being extended to schools, hospitals, and museums among other public places. A two-pronged approach of relentless enforcement of tougher penalties and higher tobacco taxes levied as contributions towards the future health-care costs would greatly enhance the deterrent effect.

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