American-owned Philip Morris Philippines Manufacturing Inc. (PMPMI) is proposing a uniform absolute increase across all tax brackets of cigarettes to ensure higher tax take for the government as against the government’s proposed tax indexation.
A source said that PMPMI is opposed to the government’s proposed indexation of cigarette taxes because this will result in downtrading as consumers will shift to lower-priced brands.
The government proposal is to index the tax brackets of net retail prices by 37.3 percent which is the cumulative inflation rates from 1997 to 2001 and to index the tax rates by 22.6 percent which is the cumulative inflation rates from 2000 to 2001.
In 2000, only the tax rates were increased by 12 percent but the corresponding brackets of net retail prices were not adjusted accordingly.
This means the current brackets are still those adopted in 1997 while the tax rates adopted were those adopted in 2000 when prices have moved up significantly since then.
But the source said that by implementing the tax indexation scheme, this will widen the price gaps in the present tax brackets.
At present, the low priced brands of below
R5 per pack are taxed with P1.12 per pack while the medium-priced of P5 to P6.50 per pack has a tax rate of P5.60 per pack while the high end with a price range of P6.50 to P10 is slapped with P8.86 tax per pack and the premium brand with price of P10 per pack and above is taxed with P13.44 per pack.
The proposed indexation will raise the tax rate (multiply by 1.22 percent) of the lowest bracket to P1.37 per pack, the medium with go up to P6.87, the high-end to P10.98 and the premium brand will become R16.48 per pack.
To get the increase in tax brackets, multiply it by 1.373 percent. Thus, the lowest tax bracket would be increased to P6.87 per pack instead of the present P5.
"Because the government is using percentages, the change for the low price-brand is just a mere 25 centavos while the high-end brand means a two peso increase in absolute terms. The indexation of sin products would mean a widening of the gap between the tax brackets,’’ the source said.
"This will result in switching or downtrading to cheaper brands from high end or premium brands,’’ he said and eventually leads to lower government revenues because the lower brands are slapped with lower taxes.
This is so because 48 percent of the cigarette consumers are using the low priced brands.
On the other hand, by implementing a uniform absolute increase in tax rates across all cigarette segments assures the government of higher revenue as this will not create distortion in the tax brackets and prevent downtrading.
PMPMI, however, does not fear of losing out in the low-end brands market having acquired low-end brands in anticipation of stiff competition in the lower-priced brackets, which is dominated by Fortune Tobacco Corp.
Last year, PMPMI acquired four cigarette brands of Sterling Tobacco Corp. – Bowling Gold, Stork, Miller, and Bowling Green – to complete its products offering and complement’s existing portfolio of international premium brands – Marlboro and Philip Morris Menthol 100s and the mid-priced brand L&M.
The government hopes to raise an estimated additional revenues between P14 billion to P19 billion from the indexation of excise tax on cigarettes alone.
Last year, the tax revenues generated from the industry amounted to P19.6 billion.
Indexation of sin products such as cigarette and alcoholic products is among the four tax measures the Arroyo administration would like Congress to pass this year to be able to raise P60 billion this year.
The three other measures are the two-step increase in VAT, reimposition of franchise tax and petroleum taxes.
These measures are part of the eight tax measures of the government to balance the national budget by 2010.
