Does raising cigarette taxes reduce smoking or encourage the production of illicit tobacco?

Does raising cigarette taxes reduce smoking or encourage the production of illicit tobacco?

Tobacco control advocates are urging the Cambodian government to increase excise duties on tobacco products to generate additional revenue and reduce the effects of smoking on the general population.

At first glance, a tax increase may seem like a simple solution to discourage smoking, although it has been shown to have little impact on smoking rates and has the negative side effect of encouraging smokers to turn to smoking. illicit options, fuel criminal activity and reduce legal smoking. tax revenue stream.

First research platform Macrotrends found that smoking prevalence has declined in Cambodia over the past decade despite the country’s lower excise rates by 25% compared to neighboring Thailand by around 70%, Singapore by nearly 68% and about 64% in Malaysia. .

The smoking rate in Cambodia was 34.6% in 2007 and 21.8% in 2018. This is a much better development than in countries like Malaysia, where smoking rates have only declined than 3.9% in 11 years, from 25.7% in 2007 to 21.8% in 2018, after significant increases in excise duties.

The increase in excise duties will fuel the illicit tobacco trade and deprive the government of valuable tax revenue. Every year, billions in excise duties and other taxes are lost to the black market, which could be used for much-needed public works programs.

According to Oxford Economics, 6.1% of cigarettes in Cambodia were illicit, costing the government 13.2 billion riels ($3.3 million), the highest level recorded since the Asia Illicit research program Tobacco Indicator included Cambodia for the first time in 2013.

A study by the SSRN Research Network found that a 10% increase in the price of legal cigarettes, which could result from a tax increase, results in a 3.6% increase in the illegal market share.

Malaysia increased excise duties on tobacco in 2016, leading to a substantial increase in illicit trade and tax evasion. According to the New Straits Times, more than 65% of cigarettes in Malaysia are illicit, costing RM5 billion ($1.2 billion) in excise revenue.

Due to a sudden increase in prices due to high taxation, smokers often turn to cheaper illicit options, creating an environment conducive to criminal organizations.

Over the past two years, agencies in the affected countries have intercepted shipments from Cambodia.

SHINE reported in October 2020 that police arrested 43 suspects in a 400 million yuan ($59.5 million) counterfeit cigarette case in the largest cross-border crackdown of its kind in Shanghai. . They were suspected of manufacturing counterfeit cigarettes of premium brands such as Chunghwa, Peony and Panda in Cambodia and smuggling them into China with the intention of reselling them throughout the country.

The Phnom Penh Post reported in June 2020 that the Ministry of Interior’s Commodities Anti-Counterfeiting Department raided an illicit cigarette production site in Kampong Speu province and seized 1,000 packs of cigarettes, two cigarette production machinery and other equipment. The governor said the cigarettes were made for export to China.

An illegal tobacco infrastructure in Cambodia already exists to support smuggling to neighboring markets such as China, Vietnam, Thailand and India, and we are fortunate that these criminal organizations have not yet shifted their operations to the local market.

With a significant increase in taxes, the government will add fuel to the fire of illicit tobacco and encourage criminals to direct their attention to the domestic market.

International experience shows that sudden and steep tax increases are counterproductive – governments risk losing tax revenue as legal products become unaffordable and consumers turn to cheaper, often illegal, products. marketed by criminals, without succeeding in achieving meaningful health objectives.

Adopting a stable, long-term approach to tax policy, coupled with strict enforcement, best meets the government’s goals of increasing sustainable tax revenue, while educating the public about the effects of smoking and a healthy lifestyle contributes to the achievement of public health policy.

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