A new front has opened in China’s tobacco war – the Ministries of Health and Finance are lobbying the government to raise taxes on cigarettes in order to raise state revenue and cut consumption.
This method was widely used in developed countries, such as France and Canada and reduced the level of consumption and the cost of treating cigarette-related diseases.
A study published in January in the New England Journal of Medicine said tripling tobacco taxes around the world would reduce by 433 million people the number of smokers worldwide, currently 1.3 billion, and prevent 200 million premature deaths.
China has more than 300 million smokers; they consume two trillion cigarettes a year, one-third of global consumption.
But the State Tobacco Monopoly (STM) is arguing the opposite – that higher taxes would lead to a drop in revenue to the state because they would cause widespread tax evasion and smuggling and a switch to cheap brands that bring lower revenue.
The issue is one of critical importance to China’s treasury. According to official figures, the China National Tobacco Co. paid 1.58 trillion yuan in taxes between 1982 and 2004.
Figures published by the National Audit Administration on June 20 this year showed that in 2012 CNTO made a daily profit of 450 million yuan, more than Bank of China, Agricultural Bank and China National Petroleum Corp. Since it is 100 percent state-owned, all profits go to the treasury.
In his annual work report on January 16, STM director general Ling Chengxing put the amount paid in 2013 in profits and taxes at 955.99 billion yuan, an increase of 10.53 per cent over 2012. These account for about 7 percent of national revenue.
The battle was fought at a recent seminar hosted by Beijing Normal University with the title “Raise Tobacco Taxes, Reduce Risk to Health”.
Among those arguing in favor was Huang Jifu, deputy minister of health, officials of the Ministry of Finance and two ex-deputy bureau chiefs of the National Bureau of Taxation.
Zhao Jinping, direction of the Foreign Economic Research Bureau of the State Council’s Development and Research Center, presented a paper that gave the positions of the health and finance ministries.
“The international average of tax as a percentage of the retail price of a packet of cigarettes is 60-70 percent,” he said. “In China, it is 45-50 percent, a gap of 10-20 percentage points. If we raised the tax by 15 percentage points, it would certainly raise tax revenue. There could be a drop in consumption of 7.5 per cent.”
The World Health Organisation has proposed that China raise the retail tax level to 70 per cent.
Xu Shanda, ex-deputy chief of the National Tax Bureau, said he had compared the prices of cigarettes in 20 countries.
“Taking into account purchasing power, the average price of a packet in China is 5 yuan, which is the lowest of the 20, even below Zambia and Bangladesh.”
In response, the STM’s Eastern Tobacco Newspaper published an interview with Li Baojiang, head of the policy research division of the monopoly’s Economic Research Bureau. “There is a wide gap between the elegant theory and the real situation,” he said.
He said that if all the taxes levied on cigarettes were added together, they totalled 59.5 percent “This is a substantial amount. Take the example of Britain, which suddenly implemented a high increase in tobacco tax. Since demand was strong, it led to a flood of smuggling, with loss of control of the market and a drop in tax revenue. When the same thing happened in Sweden, the government reduced the level of tax.”
Liang Ji, a researcher with the Ministry of Finance, said that the last significant increase in tobacco tax was in 2009. “Afterwards, we did a study of the results and discovered that, despite the higher prices, consumption did not fall. Actually, it increased.”
STM is also playing the card of weak demand. In his work report in January, Ling put the 2014 target for taxes and profits at 1.03 trillion yuan, a year-on-year increase of 8 percent.
In recent comments, Ling said: “It will be very hard to meet the 2104 target. In a year when the economy is weak, the tobacco industry is a crutch.”
STM said that during the first five months of the year, demand for cigarettes was weak, with a fall in May, especially for cheap and middle-market brands.
“Most profits come from expensive brands,” said one STM official. “If we raise taxes, more people will switch to cheaper brands, making things worse.”
The tobacco control lobby is stronger with the support of the Ministry of Finance. But there is far from consensus within the government and control measures to which the government is committed on paper are not implemented rigorously. The debate has a long way to run.
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