World Bank urges PH to hike tobacco, alcohol taxes.

The World Bank has urged the Philippine government to increase the share of excise taxes on tobacco and alcohol to nearly 1.3 percent of gross domestic product (GDP) in the next five years.
In a report, the World Bank said the move would not only increase its income share to the government coffers but the additional revenues can be used to improve health services and social protection.

“Likewise, the incremental revenue would enable the government to increase its human and physical investment to improve the country’s growth and development prospects,” the World Bank report said.
It added that this would also address the large negative externalities arising from smoking and drinking, and to discourage their consumption.

“Over the medium term, higher excise rates would induce the poorer households to reduce consumption compared to wealthier households, thus savings from reduced consumption (by the poorer households) can be channeled to food and human capital investment to enhance their welfare,” the World Bank said in its latest Philippine quarterly update.
The report recommends specific taxes over ad valorem, stating that specific taxes are automatically and frequently indexed to inflation.

“Ad valorem excises are more complex to administer since the value of the product has to be ascertained and is prone to transfer pricing abuse. This leaves more opportunities to challenge the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) assessments as opposed to specific excises, which simply require counting physical quantities,” it said.

For tobacco, the World Bank recommends a shift to a uniform excise tax rate for all cigarette brands. The Philippine government must raise excise tax rates to achieve an average excise to retail sales price (RSP) ratio of 50 percent in 2012 (and 60 percent by 2016), and index excise rates to nominal GDP.
 By indexing, the excise tax rates to nominal GDP growth will keep the excise burden from falling, avoid revenue erosion in the future, and provide funds to improve health services.

It further suggested that government must ensure all tobacco taxes are subject to specific tax rates, including cigars. The move will further improve administrative efforts to minimize leakages from smuggling due to the proposed higher tax region, it added.

The rationale behind the World Bank recommendations is that a shift to a uniform excise tax rate for all brands will remove production distortions, discourage consumption, and improve equity across brands.
“The current multi-tier price classification system has no clear policy rational and is unique internationally. It therefore should be abolished,” it added.

The report said that the Philippines must bring the excise rate closer to regional rates while increasing revenue.
Philippines reflect a 48.2 percent tax burden to retail sales price while Thailand slaps 73.2 percent to RSP; Indonesia with 51.8 percent to RSP; Pakistan with 69.3 percent; and China with 62.2 percent.
For alcohol, the Philippines reflects an excise to RSP of 26.1 percent for beer and 5.5 percent for wine. In Thailand, it is 55 percent for beer and 25 percent for wine; in Vietnam, 50 percent for beer and 25 percent for wine; in Cambodia, 30 percent for beer and 10 percent for wine.