Many skeptical about tobacco tax hike goals

Results from a 2012 survey conducted by the International Tax and Investment Centre and Oxford Economics showed that Vietnam was the second largest market in illegal tobacco consumption among the 11 Asian nations polled.

Figures show 104.8 billion cigarettes were consumed in Vietnam last year, of which 17 billion were illegally imported, according to the Vietnam Tobacco Association (VTA).

Also according to the VTA, from 2006 to 2012 the volume of smuggled tobacco spiked 50 per cent (tantamount to six billion cigarettes) following successive rises of the special consumption tax (SCT) rate on cigarettes, from 45 per cent in 2005 to 55 per cent in 2006 and 65 per cent in 2008.

As such, the Ministry of Finance’s (MoF) newest SCT hike proposal has triggered concerns over a possible upsurge in tobacco smuggling.

Under the MoF proposal, the SCT on cigarettes would increase to 75 per cent in July 2015 and again rise to 85 per cent from January 2018.

The VTA estimates Vietnam’s tobacco industry would lose sales of 5.7 million cigarettes to smugglers when the tax goes up to 75 per cent and lose a further 10.4 billion cigarettes once the rate hits 85 per cent. Respective losses to state coffers would be $97.5 million and $198.5 million.

In fact, whenever the tax on cigarettes has risen notorious tobacco smuggling regions such as the southwest of the county, Quang Ninh mountainous area, coastal provinces and central region localities bordering neighbouring countries were vibrant with the influx of illegal products.

This is both because locally produced tobacco bears the additional cost of increased taxes and efforts to stymie illegal imports have thus far been ineffective.

Another factor is that local demand for tobacco products is huge despite a number of campaigns to educate people on the harmful effects of smoking.

Consumers cannot be expected to participate in the battle against illegal products by opting not to buy cheaper and therefore likely illegal products as many people in Vietnam are recently facing economic difficulties.

Another repercussion is that the tobacco industry and its workers, including tobacco growers, feel the negative effects of smuggling.

The VTA is assuming that a higher SCT rate in the current context would only result in downsized local production and very little increase to state coffers as smuggling would commensurately increase.

Instead, it has proposed the government ramp up anti-smuggling efforts to first stabilise the situation and ensure the state budget is getting its share of the profits.

A suitable tax hike plan would be important once illegal tobacco smuggling was under control.