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Neil H. Cruz: “Cheap cigarettes from China flooding PH”

Neil H. Cruz, a writer known for his anti-policy, opinionated (and sometimes wacky) columns for the Philippine Inquirer, expresses somewhat naively his concerns about the high tobacco tax policy in the Philippines:

The government raised the excise tax on cigarettes to increase tax collection and, allegedly, to force smokers to quit or at least smoke less. With the price of cigarettes sky-high because of the higher taxes, the government reasoned out, smokers would either smoke less or quit smoking completely, thus saving themselves from the ravages of lung cancer, emphysema and COPD (chronic obstructive pulmonary disease), all of which can be fatal.

The high tax regime has been in force since January. Has it forced smokers to quit? No. Has it pushed street prices of cigarettes high enough to make smokers quit? No. Has the government been able to collect more taxes? Still no.

Worse, what Filipinos are smoking now is much more harmful to their health than what they used to smoke. What happened?

Smuggling. When the “sin tax” was being crafted, this column warned that cigarette smuggling would flourish, as had happened here before and in other cities when taxes were raised drastically. It is happening now.
Smuggled cigarettes sell for P1 per stick, less if you buy by the pack. They are sold out in the streets, in sari-sari and convenience stores everywhere with posters that scream “low prices!” at every passing man, woman, and child.

Unfortunately, smokers who can buy cheap cigarettes tend to smoke more and are not financially motivated to quit. Already, 25 percent of Filipino smokers of higher-priced premium and subpremium brands have shifted to the smuggled P1 brands.

In the Philippines’ 100-billion-stick market, that translates to 25 billion sticks or 1.25 billion packs that should have been taxed at a higher rate of P25 per pack, instead of just P12. The government is losing about P16.3 billion in taxes per year.

Statistics show that contrary to expectations, the smoking rate among Filipinos has not subsided since Republic Act No. 10351 was implemented.

It has gone up instead. The average daily consumption has grown from 13.5 sticks per smoker in the first quarter of the year to 14.1 sticks per smoker in the second quarter.

The increment may be slight but it is certainly puzzling. The reason is the raging popularity of cheap smuggled cigarettes.

Under a high excise tax regime, how can cigarettes be made at such ridiculously low prices?

RA 10351 collapsed the previous four-tier tax rate to only two—high-priced and low-priced—with the high-priced brands paying a tax of P25 and the low-tier paying half, P12, for each pack of cigarettes.

Makers of cheap cigarettes pay not only the P12 in excise tax but also P1.91 as value-added tax, P5 for wholesaler margins, and discounts for downstream retailers. After everything is settled, manufacturers of cheap cigarettes are left with almost nothing with which to manufacture a pack that sells for less than P20.

There are only two ways that a cigarette manufacturer can turn a profit from the P1-per-stick brands. By using substandard raw materials or outright tax evasion.

Cheap cigarettes are made of poor-quality tobacco called “sweepings.” Also known as refuse or scraps, sweepings are discards raked up from warehouse floors after high-grade tobacco for premium cigarette makers are sold. It is the equivalent of “pagpag,” a sorry mix of leftovers from fast-food restaurants gathered by the poor for recooking and resale to hungry neighbors.

Sweepings constitute the cigarettes produced in China’s Yunxiao county, where the cheapest cigarettes in the world are made. With a measly population of 392,000, Yunxiao hosts 200 cigarette factories producing 400 billion counterfeit cigarettes a year, four times the volume of the Philippine tobacco industry.

But lab tests reveal that their products are nothing but “poop sticks,” which emit higher levels of dangerous chemicals—80 percent more nicotine, 130 percent more carbon monoxide—and contain impurities like insect eggs and human feces.

We know that all cigarettes are harmful. Yet, how can we even begin to describe the health risks in cheap cigarettes, which are priced for adolescents?

Tax evasion can also make cigarettes cheaper. For example, RA 10351 waives excise taxes for tobacco sweepings as well as cigarettes for export. But what if the boat carrying cigarettes bound for overseas markets makes a U-turn and comes back to the Philippines with its load?

Remember the old Champion Blue trick of the 1970s?

Champion, a locally made brand, was “exported” to Sabah only to swim back to our porous shores as smuggled “blue seal” cigarettes. Quickly, smokers of local Champions switched to the untaxed, more prestigious “imported” version. They did not realize that, tax-paid or not, Champion was sold nowhere else but in the Philippines.

In the past, profits from cheap tobacco were made at the expense of the government through the “export” route. A similar scheme can be operating today. Are smokers of P1-per-stick cigarettes be inhaling untaxed tobacco sweepings?

9 Oct 2013

The line of thinking in Mr. Cruz’s article is this: after the increase in tobacco tax, there has been an increase in demand and consumption of smuggled cigarettes made available at extremely low prices, while there has been no reduction in smoking, thus the increase in tobacco tax is to blame for this.

The 'Champion Blue' cigarettes, manufactured locally in the Philippines by Philip Morris, sails out of the country and returns to be sold as prestigious 'imported' products. (shipblm_2008/flickr)

Admittedly, sometimes it is necessary to make our own connections between ‘before’ and ‘after’ events. The problem in Mr. Cruz’s account, though, is that the blame is laid on the high-tax policy when he does not actually examine the machinations of the tobacco smuggling phenomenon, which makes his connection a rather meaningless conjecture; although given Mr. Cruz’s policy of writing against any government action, it is not surprising that he jumped into such a conclusion.

In fact, the concern here is that smuggling operations seems to be taken for granted as a part of life in the Philippines. The relative ease with which cigarettes and ‘sweepings’ are smuggled into the country should highlight both the intent of tobacco manufacturers to flood cheap tobacco products into the local market and, more importantly, the lack of law enforcement over the smuggling operations. Mr. Cruz even cites a case of ‘Blue Champion’ brand of cigarettes where the local manufacturer combines a tax loophole with daring smuggling operations to ensure low product pricing and high attractiveness. Curiously, Mr. Cruz makes no criticism or even any slight disapproval over what any sensible person would understand, that such rampant smuggling operations are indicators for poor performance on the part of customs and police officials. It is this laxity in combat against smuggling, for whatever reason, that allows for the affordability and availability of smoking opportunities to young and old alike.

(One might not be interested in the personal habits of Mr. Cruz, but following his wacky style of conjectures, perhaps one might also picture some day past in Mr. Cruz’s workplace, when he sits reading the news smoking a nice, tax-paid branded cigarette, and, learning of the government’s decision to impose higher taxes on tobacco and the higher prices he will have to pay for his smokes, starts furiously typing a column in indignation…)

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