1 Presentation on Taxation of Cigarettes RESEARCH AND POLICY UNIT MINISTRY OF FINANCE SAINT LUCIA 2 Introduction • St Lucia is a signatory to the Framework Convention on Tobacco Control (FCTC) of the WHO. • As such St Lucia is obligated to implement measures to discourage use of cigarettes and other tobacco products. • Article 6 of the FCTC recognizes that price and tax measures can be implemented to control the use of tobacco products. • This presentation draws heavily on the WHO’s TaxSim model to simulate the impact of raising taxation on cigarettes. 3 Basic facts about cigarettes imports Imports of Cigarettes in 2013* CIF Value ($ Mil.) 6.53 Volume In Kgs. (thousands) 69.99 In Sticks (Mil.) 58.32 In 20 stick packs (Mil. equivalent) 2.92 Value imported from Caricom ($ Mil.) 6.12 o w Trinidad ($ Mil.) 5.97 Import Duty (Mil.) 0.19 Excise Tax (Mil.) 9.60 VAT (Mil.) 2.36 Service Charge (Mil.) 0.33 Total taxes on Cigarettes 12.47 * Imports for domestic use only 4 After peaking in 2008 imports of tobacco products have been declining 5 St Lucia has actively changed its tax structure on cigarettes in recent years Chronology of Tax Changes on Cigarettes 2003 to 2012 Year Import Duty Ctax/Excise tax Environ. Levy Service Charge Rate Rate 2003 45% Ctax of 50% 1.5% 5% 2007 45% Ctax of 70% 1.5% 5% 2009 45% Ctax of 100% 1.5% 5% 2011 45% Excise tax rate of 1.5% 5% $125.60 per Kg. September 2012 45% Excise tax rate of None 5% $176.00 per 1,000 sticks 6 St Lucia has the highest rate of tax on cigarettes in the region Tax Share in a 20 stick Packet of Cigarettes in 2014 Country Brand Total Tax Share Antigua and Barbuda Benson & Hedges 20.2% Belize Colonial 37.1% Dominica Hills borough 23.4% Grenada Du Maurier 47.8% Guyana Pall Mall 25.2% Jamaica Craven A 42.9% Saint Kitts and Nevis Benson & Hedges 19.8% Saint Lucia Vice ro y 62.9% Saint Vincent and the Grenadines Du Maurier 16.8% Suriname More llo 53.6% Trinida d a nd Toba go Du Maurier 29.6% Source: PAHO 7 Market share by brand 8 Composition of the retail price of a pack of cigarette ETR = Effective Tax Rate Retail price RP $16.68ETR Retail price $16.68 Retail price ETR 61.4% 49.2% $11.25 $11.25 ETRRP $11.25 Retail price 42.2% $7.25 Retail price RP $7.25 ETR 61.7% $7.25 ETR 49.2%RP $16.68 ETR 45.8% ETR RP$11.25 63.0 % 9 Tax composition of a pack of cigarette Total taxes $8.20 Total taxesTotal taxes $5.16 Total taxes Total taxes $4.57 $4.75 $4.45 10 Impact of a 70% Increase in Excise Tax – per pack of cigarettes Baseline Simulation Baseline: Taxation per 20 stick pack of Cigarettes* Simulation: Taxation per 20 stick pack of Cigarettes* Final % Final increase Import Service Excise Total Import Service Excise Total CIF price VAT Margins Consumer CIF price** VAT Margins Consumer in Final Duty Charge Tax Taxes Duty Charge Tax Taxes Price Price Consumer Price Marlboro 5.00 2.25 0.25 2.18 3.52 8.20 3.48 16.68 Marlboro 5.25 2.36 0.26 2.66 5.98 11.27 3.85 20.37 22.1% Benson & Hedges 3.52 0.00 0.18 1.47 3.52 5.16 2.57 11.25 Benson & Hedges 3.70 0.00 0.18 1.92 5.98 8.09 2.91 14.69 30.6% Viceroy 2.00 0.00 0.10 0.95 3.52 4.57 0.68 7.25 Viceroy 2.10 0.00 0.11 1.38 5.98 7.47 1.02 10.59 46.0% * Based on a 70% increase in the rate of excise tax on cigarettes * Based on current tax structure on cigarettes ** Assuming a 5% increase in import prices 11 Impact of a 70% Increase in Excise Tax on Sales and Revenue Baseline Simulation Baseline Revenue Scenario Simulated Revenue Scenario* Sales Service Import Sales Service Import Market Total Tax Excise VAT Industry Market Total Tax Excise VAT Industry Volume (in Sales Value Charge Duty Volume (in Sales Value Charge Duty Share Revenue Revenue Revenue Revenue Share Revenue Revenue Revenue Revenue pkts of 20) Revenue Revenue pkts of 20) Revenue Revenue Marlboro 265,807 12% 5,414,238 2,366,565 1,590,586 706,205 69,774 627,968 3,047,673 Marlboro 291,604 10% 4,863,955 2,389,885 1,026,446 634,429 72,901 656,109 2,474,070 Benson & Hedges 493,992 22% 7,257,697 3,993,991 2,956,046 946,656 91,290 - 3,263,705 Benson & Hedges 583,208 20% 6,561,090 3,011,331 2,052,892 855,794 102,645 - 3,549,759 Viceroy 1,477,300 66% 15,642,023 11,035,545 8,840,165 2,040,264 155,117 - 4,606,477 Viceroy 2,041,228 70% 14,798,903 9,319,537 7,185,123 1,930,292 204,123 - 5,479,366 Total 2,237,098 28,313,958 17,396,102 13,386,797 3,693,125 316,180 627,968 10,917,856 % Change -23.3% 8.0% 18.2% 30.4% 8.0% -16.7% -4.3% -5.1% Total 2,916,040 100% 26,223,948 14,720,753 10,264,461 3,420,515 379,668 656,109 11,503,195 * Based on a 70% increase in the rate of excise tax on cigarettes 12 Summary of Main Findings • Assuming the various elasticities of each brand of cigarette, Govt can earn an additional $2.7 Mil with a 70% increase in the excise tax rate. • A 70% increase in excise tax will result in a 41% average increase in retail prices of cigarettes. • However, this will also result in a 23% decline in sales volume. • Total tax revenue on cigarettes will increase by 18%. • Excise tax revenue on cigarettes will increase by 30% • The share of total taxes in the price of each pack of cigarette will increase from average of 56.1% to 61.4%. • The share of excise tax in the price of each pack of cigarette will increase from average of 39.1% to 47.3%. • Cigarette is a good product to tax but we have almost exhausted taxing cigarettes. 13 The value of cigarettes imports declined from 2012 but increased from 2015 Value of Imports of Cigarettes 12.00 10.41 10.00 9.11 7.38 8.00 6.91 6.53 6.57 Millions 6.40 6.00 2010 2011 2012 2013 2014 2015 2016 4.00 2.00 0.00 14 Recommendation.