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Chapter III
Tax Administration
Share of tax in retail price: As seen in Annex Table 3, the share of total tax
in retail price varies between 8 percent and 89 percent among countries (WHO
GTCR, 2009). The share of tax in retail price ensures revenue increases as long as
the tax rate increase is far larger than the price increase it generates. That means,
revenue increases would be ensured in many instances, even when the price
elasticity is greater than -1 (in absolute value).
Table 6 below shows the percentage of increase in revenues under different
price elasticity scenarios and different tax shares by country income groups, as
the excise tax per pack of cigarettes increases by 50%, 75% and 100%. It demon-
strates that low and lower middle income countries could generate significant
revenues if they increase their excises, even when demand for cigarettes becomes
less inelastic in the near future. Note that estimations here do not take into ac-
count the impact of increases in per capita income on cigarette consumption and
hence on revenues.
19 The less elastic the demand, the less effective the tax in reducing cigarette consumption, but
the greater the gain in tax revenues.
tax ADMINISTRATION 57
Table 6. Percentage increase in excise revenues under different price elasticity scenarios.
Note: These calculations do not take into account brand substitution (cross price elasticities),
income effects or illicit trade. VAT and retailers’ margin (RM) are assumed to be 15% and 10% of
retail price respectively.
Source: Author’s calculations using data from WHO GTCR 2009
Income effect: Empirical evidence from most low and middle income countries
indicates that there is a positive relationship between demand for cigarettes and
per capita income. When per capita income increases, consumers may increase
their consumption or switch towards more expensive brands, and these would
contribute positively to the revenue stream. However, data between 1990 and
2007 reveal that the relationship between income and cigarette consumption has
been reversed in higher income countries. During this time, average real GDP per
adult population (15 years old and up) increased by 19.5 percent worldwide, from
US$6,848/adult to US$8,181/adult. At the same time global cigarette consumption
per adult population decreased by 17 percent from 1,453 pieces to 1,208 pieces.
Although higher income countries experienced a 26 to 27 percent increase in per
58 Chapter III
$5.00 90%
80%
$4.00 Price Gap $1.60 70%
60%
$2.90
$3.00 50%
40%
$2.00
$1.30 30%
$1.00 20%
10%
$5.00 90%
$1.00 20%
10%
$1.00 20%
10%
$1.00 20%
10%
$5.00 90%
80%
$4.00 Price Gap $2.10 70%
$3.40
60%
$3.00 50%
40%
$2.00
$1.30 30%
$1.00 20%
10%
$5.00 90%
Price Gap $4.10 80%
$4.00 70%
60%
$3.00 50%
40%
$2.00
$1.30 30%
$1.00 20%
10%
21 Center for Tax Policy and Administration (2008). Forum on Tax Administration: Compliance
sub-group. Final report. Monitoring taxpayers’ compliance: A practical guide based on Revenue
body experience. www.oecd.gov.
tax ADMINISTRATION 67
Tax stamps: Tax stamps are required by many countries as a way of ensuring
tax payers’ compliance by monitoring production and distinguishing licit tobacco
products from illicit ones. Products that don’t carry tax stamps are considered to
be illegally produced or smuggled. However, the application of tax stamps varies
by countries. For example, tax stamps are required for brands produced by com-
panies producing over 50 million pieces of cigarettes annually and their brands
meet the national standards by Viet Nam, or hard packs of cigarettes first, then
for all cigarettes, in Bangladesh (ERC, 2008). Uruguay do not require tax stamps
on cigarettes sold in duty free shops located in border areas and in airports, but
require orange stickers on them with the message “For sale only at duty free shops”
in order to avoid their resale in the country (Euromonitor, 2008). Similarly, Serbia
required a red stamp for locally manufactured brands, green for licensed brands
and blue for imported brands (ERC, 2008).
Cost of tax stamps: Companies pay the cost of tax stamps or banderoles at
the time of purchase from the tax or other dedicated authorities. The value of
each stamp is calculated differently, by piece of cigarette (e.g. Indonesia), cigar,
cigarillo, per 1000 pieces (e.g. EU), or a pack of a number of cigarettes, and per
kilogram for tobacco. The relatively low cost of stamps is paid by the manufac-
turers or distributors but this cost is shifted to consumers as a price increase.
Initially some countries subsidized the cost (e.g. Viet Nam), but today manu-
facturers pay and shift the cost to consumers, increasing the retail price.
Digital tax stamps: Another alternative is a digital tax stamp. Similar to the
banderole stamps, digital tax stamps provide an effective tracking and tracing
system to reduce tax evasion. They carry information about the brand and manu-
facturer’s name, the facility where the products are produced, the time the stamp
was produced and purchased and so on, so that the product can be traced back to
its source. The main difference between the two high tech stamps may be in the
way they operate. With the banderoles, the Ministry of Finance gets all the neces-
sary information live, as the cigarettes are being produced. The digital system on
the other hand, requires distributors to place an order via a secure connection to
a designated government authority. After the authority verifies and approves the
order, the distributor fulfils the order by delivering encrypted codes and authoriz-
ing digital stamps. However, it is not clear how the authority verifies the order.
It is the cigarette distributor that prints the digital stamps and then the cigarettes
are shipped to retail outlets (Authentix, 2006).22
Cost of advanced tax stamps: The banderole system is a more expensive sys-
tem than a traditional tax stamp systems. A number of countries have been
examining its adoption, including Philippines, Indonesia, Pakistan, Russia,
and Ukraine, but cost has been an impediment to adoption and implementa-
tion. In Turkey, the total cost of the system is divided into a five year payment
plan based on the production of the cigarettes and alcohol. For cigarettes, the
cost is spread over the price of banderoles based on the quantity of cigarette
production; this has increased the cost and raised the retail price by 6TL/1000
cigarettes (0.38% to 0.21% increase of the average retail price/pack for economy
and premium brands respectively, in 2009) for five years. In Brazil, it was the
duty of cigarette manufacturers to pay for the installation and maintenance
of the system on each production line (1% to 1.6% of retail price/pack). For
Philippines, the cost of implementing the system for the tobacco and alcohol
industry will be borne by the tobacco and liquor companies.23
22 Presentation made by Authentix in 2006 at the FTA Technology Center, Albuquerque, New
Mexico, August 14, 2006
23 The Manila Times, 11 May 2009 Link: http://tiny.cc/cngKE
70 Chapter III
Payment of excises
The global application of tax payments is usually based on the manufacturers’
declaration of their production level. The tax is paid within a minimum of 15 to
a maximum of 30 days after cigarettes leave the factories, as is the case in Turkey,
Pakistan, Egypt, and the EU. In Turkey, manufacturers pay excise tax revenues
on the 15th day of each month for the last month’s excise sales. In Egypt, it is on
the 30th of each month that the revenues are paid.
Floor-stock tax
When the manufacturers, wholesalers or the retailers expect a tax increase,
they may stock a number of cigarettes to take advantage of the current, lower tax
level. If the excise is levied at the manufacturing stage, and the manufacturers
declare the production before the new tax becomes effective, then these products
may be subject to the old tax, which is often the case by law (Sunley et al., 2000).
In order to eliminate this possibility, and its corresponding tax avoidance, the
tax law may be changed to enable tax administrators to collect the new tax for
the cigarettes that were produced, and kept in stock, before the new tax became
effective. Collecting new taxes on cigarettes that are stocked at the manufacturing
or wholesale stage could be easy and efficient, but this is often not the case at the
retailer level. From an efficiency standpoint, the law can specify that a floor tax
can be imposed when the stocks are at a “certain level” and the increase in tax
rate is significant. In that case, the tax loss can be covered and higher prices are
ensured for those products.
tax ADMINISTRATION 71
3.3 Summary
Strong tax administration is a requisite for ensuring
high compliance effectively and administering tax policies efficiently.
Good tax administration requires strong technical capacity supported
by a well-designed tax. Given the low price elasticity and low share of
excises in retail prices, countries still have room to increase their excises
in order to increase revenues while reducing tobacco consumption.
However, administrative agencies should be aware of the market condi-
tions and the factors affecting tobacco sales and hence their impact on
the revenue stream. These factors should be taken into consideration
when a tax policy is designed so that both public health and revenue
objectives are achieved. It is a rule of thumb that tax should increase
more than the inflation rate and the increases in per capita income
level. That would reduce the affordability of cigarettes by increasing
retail prices while achieving higher revenues.