Challenges in Tobacco Excise Tax Collection Amid Declining Consumption

The Bureau of Internal Revenue (BIR) of the Philippines is facing challenges in achieving its P362.2 billion excise tax collection target this fiscal year due to a notable decline in tobacco product demand. BIR Assistant Commissioner Jethro M. Sabariaga highlighted that the trend in tobacco consumption has been decreasing over the past decade, indicating a significant shift in public habits.

The Shift in Tobacco Consumption

In an interview with BusinessWorld, Mr. Sabariaga stated, “You don’t see a lot of people smoking cigarettes these days. Even visually, you can confirm the shift in market demand.” This observation underscores increasing public awareness regarding the health risks associated with smoking, leading to a decline in cigarette sales. Furthermore, he emphasized that while the growth in collections from other excise categories might add to the total tax revenue, it would not be enough to balance the declining revenue from tobacco excise taxes.

Understanding Excise Taxes

Excise taxes are levied on the production, sale, or consumption of specific goods deemed less essential, including tobacco and alcohol. In the Philippines, these taxes play a critical role in government revenue, accounting for over 40% of total excise tax collections. However, the rise of vaping as an alternative to traditional tobacco products is complicating this revenue stream.

The Rise of Vape Products

Mr. Sabariaga noted that the public’s increasing preference for vape products is directly impacting the BIR’s excise tax collections. He explained that while a single vape product incurs an excise tax similar to that of one cigarette pack, consumers often take longer to finish vaping products. For instance, a cigarette smoker who typically consumes between 10 to 15 packs a month might only purchase one vape product for the entire month or even stretch it to two months. This drastic reduction in consumption frequency translates to a significant drop in tax revenue from tobacco products.

Impact of Illicit Trade

Compounding these issues, BIR Commissioner Romeo D. Lumagui pointed out the ongoing challenges posed by the illicit trade of tobacco and vape products. In the first half of 2024, the bureau reported a staggering loss of approximately P7.2 billion in potential revenue due to seized illicit products, further straining the government’s finances.

Legislative Challenges

Additionally, altering tax legislation to improve revenue collection has also hit a snarl. Mr. Sabariaga mentioned that Congress has yet to pass revenue-generating measures, including proposals for taxes on single-use plastics, junk food, and updates to the mining tax regime. The Department of Finance has opted not to support new taxes while focusing on tax administration reform, complicating the forecasting of future revenue streams.

Current Tax Collection Overview

The BIR collected approximately P194.93 billion in excise taxes from January to August, reflecting a 3.08% decline compared to previous years and falling short of the P313.06 billion target for that same period. During this eight-month window, collected excise taxes accounted for about 59% of the overall annual goal. Tobacco products alone contributed P84.42 billion, approximately 43.31% of the total excise collection, followed closely by alcohol products, sweetened beverages, mineral products, and automobiles.

Month of August Highlights

In August alone, the BIR reported a 4.88% year-on-year rise in excise tax collections, amounting to P27.74 billion, although this still fell significantly below the monthly target of P41.79 billion. Tobacco products were responsible for P12.92 billion (46.57%) of the total collections that month, which also included revenues from alcohol and sweetened beverages.

Looking Ahead

With the current economic climate and changing consumer preferences, the future of tobacco-related excise tax collections appears uncertain. While the BIR continues to pursue various strategies to boost revenue, including potential legislative measures, the long-term decline in smoking rates alongside the rise of alternative products like vaping presents an ongoing challenge.

Conclusion

As the landscape of tobacco consumption evolves, it is crucial for tax authorities to adapt and explore innovative revenue strategies that align with changing consumer behavior. The recent trends indicate a pressing need for the BIR to rethink its approach to excise taxes in a world where traditional smoking is steadily on the decline.