Smuggling is one the country’s economic realities which, according to industry analysts, is causing revenue loss for the government of up to P250 billion a year, including smuggling of fuel. This is based on a study commissioned by the Federation of Philippine Industries (FPI) on eight of the country’s major industries.
A huge amount, indeed, of foregone revenues due to smuggling, which the government could use to construct hospitals, school buildings and even subsidize its universal health-care program, the major reason for the “sin” tax legislation.
But while raising taxes on products with a wide range of price elasticity, like tobacco and liquor among others, could be an immediate solution to the government’s need for funds, its impact on the market demand for cigarette, for instance, would, however, have ripple effects on labor as volume of sales would decrease and production slowdown ensues.
A more practical option that the government could consider to raise more funds to finance its projects would be to plug the revenue leakages caused by smuggling and other forms of illicit trade, before raising taxes. If only the government can collect at least 20 percent of the P250 billion foregone revenues due to smuggling, that would be an additional P50 billion revenues to fund its universal health-care program.
I am afraid that raising the duties and taxes on locally manufactured goods would only result to a higher rate of smuggling incidents and other forms of illicit trade in the country.
And more important, smuggling distorts the local market’s level playing field as smuggled goods are usually, if not always, sold at much lower prices than those locally manufactured.
Finance Secretary Carlos G. Dominguez III also has the same view on the issue about raising taxes and smuggling, when he ordered the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR), to tighten their watch and to create a “Strike Team” against the operation of illicit trade in cigarettes.
“The proliferation of illicit cigarettes and fake tax stamps, that’s going to bloom some more next year, bantayan n’yo ‘yan,” Dominguez told BIR and BOC officials during a meeting prior to the implementation of the sin tax law’s second tranche.
We congratulate the Honorable Secretary’s determination and commitment to address the country’s smuggling problem and other forms of illicit trade, even as we are grateful for his concern for the local industry and consumers.
Thus, with the Finance Secretary’s order to the government’s two major revenue generating agencies, I rest my piece on the issue of sin tax law and its impact to smuggling.
Like filling a leaking swimming pool where more water would be needed to top the pool for a significant part of it would only be wasted, raising the taxes on sin products would only be a temporary reprieve for the government’s need for funds, as money intended for the government would only get into the pockets of smugglers instead.
This is one of the reasons why we at the FPI are working on our various advocacies to fight smuggling and other forms of illicit trade, if only to help in the government’s revenue generation efforts and to help protect the country’s local industries, the most affected sector by smuggling and other forms of illicit trade. We practically consider FPI on call, should the government need help anytime and in whatever way we can, with its anti-smuggling program.
The reported seizures of fake and smuggled cigarettes worth billions of pesos, among others, are affirmations of the proliferation of such forms of illegal activities in the country.
Dr. Arranza is the chairman of the Federation of Philippine Industries and Fight Illicit Trade, a broad-based, multisectoral movement intended to protect consumers, safeguard government revenues and shield legitimate industries from the ill effects of smuggling.
1 comment
Of course, smuggling should be addressed by the government. Reducing smuggling will reduce revenue losses, but blaming tax increases for smuggling is not as simple as it seems. Various studies and empirical evidence have shown that smuggling is primarily an issue of law enforcement and poor governance linked to corruption, and in the case of tobacco, majority of smuggled products are genuine products that have been diverted from an insecure legal supply chain to the black market. Obviously, such massive volumes leaking out of the legal supply chain doesn’t happen without the manufacturer’s knowledge, and this has been proven by internal tobacco industry documents discovered through litigation in the US. Given that the country’s largest tobacco companies are FPI members, this is a red herring. And if we are to compare the revenue losses from smuggling to the revenue gains from higher excise taxation, the tax losses are dwarfed by the tax earnings in addition to the lives that are saved, the diseases prevented, and the health care savings resulting from reduced consumption of sin products.