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NTRC TRJ: An Assessment of Republic Act (RA) No. 10351 or the Sin Tax Reform Law

The paper assesses the revenue performance of RA 10351 or the Sin Tax Reform Law based on available data from the Bureau of Internal Revenue (BIR). RA 10351 as implemented by Revenue Regulation (RR) No. 17-2012 simplified the excise tax structure of sin products by increasing the tax rates and gradually shifting the excise taxation of fermented liquors (except brewed and sold at microbreweries or small establishments) and cigarettes to unitary tax system by 2017, with the principal objectives of generating revenues to fund the universal health care program (UHCP) of the government and reducing consumption of tobacco, thus, improving the general well-being of the people. The law also changed the excise taxation of distilled spirits from specific tax to a compound tax structure to comply with the World Trade Organization (WTO) ruling on the discriminatory taxation of imported distilled spirits in the country. In addition, the new excise tax for cigarettes adhered to the commitment of the Philippines to the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC) wherein the excise tax incidence for cigarettes, which is a ratio of excise tax to price, should increase from then 29.1% to 52.5% in 2013 and 63% by 2017 It also provided for an automatic annual adjustment of four percent (4%) on the specific excise taxes of certain sin products effective on the following dates, viz.: (a) On January 1, 2014 - for wines, fermented liquors brewed and sold at microbreweries, tobacco products and cigars. (b) On January 1, 2016 - for distilled spirits (c) On January 1, 2018 - for fermented liquors, except those brewed and sold at microbreweries, and cigarettes. The law removed the price classification freeze provision under the old law (RA 9334) which pegged sin products to 1996 prices as basis for tax classification, where the proper tax classification of wines, fermented liquors and cigarettes are to be determined every two (2) years from the date of effectivity of RA 10351. It also amended the disposition of the fifteen percent (15%) incremental revenue collected from the excise tax on tobacco products under RA 8240. It also amended the disposition of the incremental revenues from the excise tax on alcohol and tobacco products by allocating the remaining incremental revenues after deducting the allocations under RA Nos. 7171 and 8240 as follows: (a) 80% universal healthcare under the National Health Insurance Program; and (b) 20% for medical assistance and health enhancement facilities program. Upon the implementation of the law in 2013, excise tax collection increased to PhP105.1 billion which is 85% or PhP48.3 billion higher than the previous year's collection of PhP56.8 billion. It also exceeded its target for the year by 22.5% or PhP19.3 billion. Coming from a high revenue base in 2013, collection in 2014 grew to PhP111.6 billion, 6% or PhP6.5 billion higher than its goal and the previous year's collection. It is noted that for the period 2009-2012, excise tax collection on sin products contributed 71.9% to 79.6% to total excise tax collection. This increased to 88.5% in 2013 upon the implementation of RA 10351. Likewise, its contribution to total BIR collection prior to RA 10351 ranged from 5.3% to 6.5% but this rose to 8.6% in 2013 due to significant increases in excise tax collection on sin products. However, in 2014, its contribution to excise tax collection and total BIR collection decreased to 87.1% and 8.4%, respectively. With regard to its share to Gross Domestic Product (GDP), the ratio prior to RA 10351 ranged from 0.5% to 0.6%. Upon the implementation of RA 10351 in 2013, the ratio to GDP increased to 0.9% but declined to 0.88% in 2014. EXCISE TAX COLLECTION ON SIN PRODUCTS, 2009-2014 (Amounts in Billion PhP) Year Sin Products Ratio to Collection Growth Rate Total Excise Tax Collection Total BIR Collection GDP 2009 44.87 74.10% 5.98% 0.56% 2010 53.51 19.26% 79.62% 6.50% 0.59% 2011 48.87 -8.67% 71.88% 5.29% 0.50% 2012 56.84 16.30% 78.56% 5.37% 0.54% 2013 105.14 84.99% 88.46% 8.64% 0.91% 2014 111.64 6.18% 87.09% 8.36% 0.88% Average 70.15 23.61% 81.70% 6.89% 0.68% Source of basic data: BIR During the first year of implementation of RA 10351, the volume of removals on distilled spirits increased by 29.4% or by 84.5 million proof liters over the previous year's removals of 287.3 million proof liters. The volume of removals further went up by 11.9% or by 44.1 million proof liters in 2014. The increase in the volume of removals in 2013 resulted in a 161.7% or PhP6.8 billion increase in collection over the previous year's collection of PhP4.2 billion. The increase in collection however is observed to be minimal in 2014 since unlike other alcohol products, the excise tax rates on distilled spirits did not increase in 2014. It is noted that the next mandatory increase will happen in 2015 when the ad valorem rate will increase from 15% to 20%. On the other hand, under RA 10351, the excise tax rates on wines increased by 27% to 36% in 2013 with a mandatory increase of 4% every year thereafter. Unlike other alcohol products, the excise tax bracket on wines was not changed. It was only the rates that were amended by RA 10351. The increase in excise tax rates on wines brought about by the law decreased the volume of removals of wines by 2.6% in 2013. The volume of removals, however, increased by 8.5% in 2014 despite the mandatory annual increase in the excise tax rates by 4% starting that year. It is noted that despite the decrease in the volume of removals on wines in 2013, excise tax collections increased by 32.7% or by PhP8.5 billion from the previous year's collection of PhP34.4 billion attributable to the upward adjustment of the excise tax rates. In 2014, the increase in the volume of removals and the 4% increase in the tax rates resulted in an increase in collection by 12.8% The increase in excise tax rates of certain brands of fermented liquors in 2013 decreased the volume of removals by 11.2% or by 175.4 million proof liters over the previous year's removals of 1.6 billion proof liters. It rose however by 1.0% in 2014 although there was an increase of 5% to 13% in excise tax rates on fermented liquors during the period. Excise tax collections on fermented liquors amounted to PhP21.9 billion which is 13.6% higher than the previous year's collection of PhP19.3 billion. For 2014, the increase in the volume of removals of 1.0% and the increases in excise tax rates pushed the collection upwards to PhP24.7 billion from previous year's collection of PhP21.9 billion. RA 10351 changed the four-tier brackets of cigarettes (low, medium, high and premium priced cigarettes) into two-tiers (low and high priced cigarettes) with gradual increases in tax rates starting from 2013 to 2016 before shifting to a unitary tax of PhP30.00 per pack for all brands in 2017. Under the law, cigarette brands will eventually move to the higher tier (retail price of above PhP11.50, with a tax of PhP30.00) from the low-tier since cigarette prices will inevitably go up due to inflation. Essentially, this indicates that all brands will be levied a single rate. It is noted that the increase in excise tax rates of certain brands of cigarettes decreased the volume of removals by 15.5% from 5.8 billion packs in 2012 to only 4.9 billion packs in 2013 which further declined to 3.9 billion packs or by 19.6% in 2014. In terms of revenue, however, total excise tax collections grew tremendously from PhP32.2 billion in 2012 to PhP67.9 billion in 2013 or by 111.1% during the first year of implementation of RA 10351 in 2013. Collection further grew to PhP74.3 billion in 2014 which is 9.4% higher than the collection in 2013. As reported by the BIR, the shift in consumers' preferences to lower-priced brands manufactured by local tobacco manufacturers contributed to the increase in the excise tax collection from cigarettes. Under RA 10351, cigars are subject to an ad valorem tax rate of 20% and a specific tax of PhP5.00 per cigar. Under RA 9334, a two-tiered rate was imposed depending on the net retail price (NRP) of cigars. It is noted that the change in the excise taxation in cigars decreased the volume of removals by 18.7% from 1.6 million pieces in 2012 to 1.3 million pieces in 2013 and further declined to 1.1 million pieces or by 16.5% in 2014. It is noted, however, that despite the decrease in the volume of removals of cigars in 2013, total excise tax collections of cigars rose significantly to PhP17.4 million from PhP6.0 million in 2012 or by 191%. However, in 2014, the 4% increase in the specific tax of cigars did not result to increase in the excise tax collection. Based on the foregoing, the passage of RA No. 10351 or the Sin Tax Reform Law successfully achieved its objective of generating additional revenue earmarked for the universal health care program of the government as well as the objective of reducing alcohol and tobacco consumption.

National Tax Research Center
Authors Keywords
NTRC; Sin Tax Reform Law; Republic Act (RA) No. 10351;
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