Lessons learned from international experience

Increasing tobacco taxes requires a reasonable roadmap: Lessons learned from international experience.

The recently drafted second version of the Law on Special Consumption Tax (amended), which the Ministry of Finance has sent out for comments, is attracting significant attention from many organizations and business communities, including the tobacco industry.

The contents of the draft that are attracting much discussion include the taxable subjects, the tax calculation method, the tax increase roadmap, and the tax rates...

For the tobacco industry, the proposed application of a mixed tax method, supplemented with absolute taxes, is expected to create an effective excise tax policy that meets the objectives of increasing prices, contributing to directing a reduction in the consumption of cheap, low-quality tobacco products, and limiting access for young people.

Around the world, many countries have been transitioning to a hybrid tax system (combining absolute and proportional taxes) as a solution to balance the goals of protecting public health and ensuring economic stability.

International experience on applying mixed taxes to tobacco products.

Oxford Economics' research on tobacco tax structures in the European Union (EU) has shown that countries applying mixed taxes with gradually increasing absolute tax proportions and gradually decreasing relative tax proportions tend to have stable or increasing tax revenues, even when the rate of legal tobacco consumption decreases.

Latvia can be considered an example. Before joining the EU in 2004, to comply with EU commitments, the country primarily increased excise taxes through proportional tax increases. However, since 2011, it has rebalanced its excise tax structure by increasing excise taxes through absolute increases and reducing relative tax rates. This change has contributed to a reduction in tobacco consumption, decreased smuggling, and ensured a stable increase in tax revenue of 1.7% per year during the period 2010-2022.

Conversely, countries like Italy and Spain, where absolute tax rates are low and there have been no significant changes in the tax structure, have seen a decline in tobacco tax revenue. For many years, the excise tax systems of these two countries relied primarily on relative tax increases, but the rate of compounded tax revenue growth has declined sharply.

The reason is that when taxes are increased relatively, cheaper products have a much greater advantage over higher-priced tobacco products. Manufacturers have less incentive to raise prices compared to when taxes are increased absolutely. Tobacco prices are suppressed, while consumers prefer cheaper options, leading to a significant decrease in tax revenue because the amount of tax collected from cheaper tobacco brands does not increase. This phenomenon causes the government to face tax revenue losses. This is what happened in Italy between 2010 and 2022 and in Spain between 2010 and 2013.

This shows that absolute taxes play a crucial role in ensuring a stable source of revenue for the state budget.

Consider a roadmap for increasing tobacco taxes in Vietnam.

Based on practical international experience, experts believe that the Ministry of Finance's proposal to apply a mixed tax in the draft Special Consumption Tax, currently under public consultation, is entirely appropriate, as it would both reduce tobacco consumption and increase budget revenue. However, the tax increase needs to be implemented cautiously and with a clear roadmap.

In the draft Law on Special Consumption Tax (amended), which has been open for public comment since June 13, 2024, the Ministry of Finance proposes maintaining the relative tax rate of 75% on tobacco and adding an absolute tax rate according to a roadmap with two options.

Specifically, Option 1 proposes an increase of 2,000 VND/bag in the first year (2026) and an increase of 2,000 VND/bag each year for the next 5 years to reach an increase of 10,000 VND/bag by 2030; Option 2 proposes an increase of 5,000 VND/bag in 2026 and an increase of 1,000 VND/bag each year to reach an increase of 10,000 VND/bag by 2030.

Speaking at the workshop on finalizing the Special Consumption Tax Law Project organized by the Vietnam Chamber of Commerce and Industry (VCCI) on July 11th, Mr. Nguyen Chi Nhan, General Secretary of the Vietnam Tobacco Association (VTA), shared that, according to the Association's calculations, in the period 2026-2030, when the Special Consumption Tax Law as proposed by the Ministry of Finance is applied, the total production of the entire industry will gradually decrease by 17% - 18%. By 2030, production will decrease from 43 billion cigarettes (2023) to approximately 1.5 billion cigarettes (2030). This will also be accompanied by a corresponding reduction in the area of ​​tobacco cultivation by about two-thirds.

It is clear that if VTA's calculations are implemented in practice, it will lead to many difficulties for the entire industry, including manufacturing businesses, suppliers of raw materials and auxiliary materials, as well as farmers in the raw material growing regions.

Based on international experience, Germany has successfully stabilized its tobacco tax revenue by implementing a moderate 2% increase in excise tax between 2011 and 2015, despite a decline in officially traded tobacco products. Prior to this, Germany had significantly increased its excise tax by 50% over a four-year period (2002-2005), yet failed to achieve the expected revenue. This also led to a surge in smuggled tobacco, forcing the country to temporarily halt further increases in excise tax from 2006.

However, conversely, Malaysia's excessively high increase in excise tax, with a 37% increase in 2015, led to a significant increase in the consumption of smuggled cigarettes, resulting in tax revenue losses for the State, while overall cigarette consumption decreased only slightly. It is estimated that approximately 59% of cigarettes consumed in the country in 2018 were smuggled, causing a tax revenue loss of around US$2.7 billion.

Tobacco businesses generally support the draft amendment to the Law in line with the Party and State's policy; however, they propose extending the tax increase schedule and setting appropriate tax rates to avoid facilitating tobacco smuggling, resulting in tax revenue losses while failing to achieve the goal of reducing tobacco use in the community.

Source: https://baodautu.vn/tang-thue-voi-thuoc-la-can-mot-lo-trinh-hop-ly-bai-hoc-kinh-nghiem-tu-quoc-te-d221093.html