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Poison pill
Updated 00:47am (Mla time) Nov 06, 2004
By Solita Collas- Monsod
Inquirer News Service

I HAVE a suggestion for the President. <img>

Various estimates have been made of the additional revenue to be derived

from indexing the current "sin" taxes to inflation. But Congress doesn't want
automatic indexation; instead, the House reportedly approved an increase of
20 percent in the excise taxes on cigarettes and alcoholic beverages (the
Department of Finance was fighting for a 30-percent increase and automatic
indexation thereafter). This is estimated to increase revenue from machine-
packed cigarettes by about P3 billion to P5 billion a year.

This is peanuts, compared to the P80 billion to P125 billion additional

revenue that is needed to get us out of the fiscal crisis. There is a better idea
that will result in the collection of at least P22 billion a year in incremental
revenues from cigarette sales--even without an increase in the tax rates.

This is not a pie-in-the-sky suggestion. All that is needed is for Congress to

remove the "poison pill" that was inserted in the 1997 National Internal
Revenue Code (NIRC) during the bicameral conference committee
meetings, naturally, out of the public eye. Actually, it is an innocuous-
sounding provision: "The classification of each brand of cigarettes based on
its average net retail price as of Oct. 1, 1996, as set forth in Annex D, shall
remain in force until revised by Congress."

How can such an innocuous-sounding phrase be so poisonous that it results

in foregone revenues estimated at P22 billion for this year (based on 2003
"removals"--the number of cigarette packs that were officially counted as
having been "removed" from their respective factories--a count widely
believed to be grossly below actual removals)?

Let's start with the "Annex D" referred to in the poison pill provision. It
contains a list of 50 cigarette brands existing as of Oct. 1, 1996, along with
their manufacturers, the amount of excise taxes they were paying (an ad
valorem, or percentage tax), and their average net retail price (ANRP),
which is the retail price excluding both excise taxes and VAT.

The ANRP is important, because it is the basis of the specific tax the brands
will pay: for cigarettes whose ANRPs are below P5, the tax is P1 per pack;
for those whose ANRPs are from P5 to P6.50, the tax is P5 per pack; for
those whose ANRPs are above P6.50 up to P10, the tax is P8 per pack; and
for those whose ANRPs are above P10, the tax is P12 per pack.

Those ANRPs are bound to increase over the years, which means that they
would eventually be subject to a higher specific tax. The poison pill
provision prevents this.

An example will show how this results in foregone revenues. Take Winston
Reds, king size, a popular cigarette brand. Its 1996 ANRP in Annex D is
listed as P5.55 per pack. That puts it in the medium-low category, requiring
a specific tax of P5 per pack. (Note: But since, under the ad valorem system,
it was already paying P5.85 per pack, per the NIRC, it must continue to pay
the P5.85, the principle being that the shift from ad valorem to specific taxes
should not result in a lower tax bill for the cigarette manufacturers.) By
August 2004, the ANRP for Winston had gone up to P16.88, more than
three times its 1996 value. Without that poison pill provision freezing the
classifications, Winston should have been reclassified into the high-price
category (those with ANRP over P10), and therefore should be paying
P13.44 per pack in specific taxes: P12 original, plus another 12 percent as of
Jan. 1, 2000.

However, the poison pill provision ensures that Winston will keep paying
only P5.85 per pack (the recent Court of Appeals decision actually brings
that further down to P5.60). Simple arithmetic: the difference between the
existing tax rate and the tax rate after reclassification (P7.59), multiplied by
the "removals" (503.219 million packs in 2003), shows that the government
lost a little over P3.8 billion in foregone revenues from Winston alone. That
amount (from Winston alone) is larger than the estimated increase in
revenue from increasing excise taxes by 20 percent.

If you make the same calculation for all the other brands, the total in
foregone revenues is P22 billion, more than 60 percent of which would
come from Fortune Tobacco brands, which means that they have been the
biggest beneficiaries of that poison pill. Why am I not surprised?

If removing that poison pill, or allowing the long overdue reclassification of

cigarette brands, results in cutting cigarette sales by one-half, think of the
health benefits. And P11 billion is nothing to sneeze at. Hitting two birds
with one stone....

The idea is not mine. It comes from the professionals at the Bureau of
Internal Revenue and the DOF, who are ever conscious of the need to raise
revenues. But they are only reiterating what was in the Senate version
(authored by Sen. Juan Ponce Enrile) of the bill in 1997, before the bicam
mangled it with the poison pill insertion.

The current ANRPs of all these brands are easy to determine and their
reclassification could be accomplished by a clerk. So one wonders why
Congress, faced with an eight-year-old list of net retail prices that form part
of Annex D, still refuses to reclassify and revise that list. (The one who
could enlighten us on the matter would likely be Rep. Exequiel Javier; he
allegedly introduced the poison pill provision.)

If the President can swing that revision, then her pronouncement that we are
well on the way to putting the fiscal crisis behind us will be more credible.

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