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Does raising tax on cigarettes reduce smoking or encourage the production of illicit tobacco?

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Does raising tax on cigarettes reduce smoking or encourage the production of illicit tobacco?

Tobacco control advocates are urging the government of Cambodia to increase excise duties on tobacco products to generate additional income as well as reduce the impacts of smoking among the general population.

On the surface, a tax increase may seem like a simple solution to discourage smoking, though it has proven to have little impact on smoking rates and has the negative side effect of encouraging smokers to turn to illicit options, fuelling criminal activity and decreasing legal tobacco tax revenue streams.

Premier research platform Macrotrends has found that smoking prevalence has decreased in Cambodia in the last decade despite the country’s lower excise rates of 25 per cent compared to neighbouring Thailand of around 70 per cent, Singapore of almost 68 per cent and around 64 per cent in Malaysia.

The smoking rate in Cambodia was 34.6 per cent in 2007, and in 2018 it stood at 21.8 per cent. This is a much better development than countries like Malaysia where smoking rates decreased by only 3.9 per cent in 11 years from 25.7 per cent in 2007 to 21.8 per cent in 2018, after significant excise increases.

Raising excise will fuel the illicit tobacco trade and deprive government of valuable tax revenue. Every year, billions in excise duty and other taxes are lost to the black market, which could be used for much needed public works programmes.

According to Oxford Economics, 6.1 per cent of cigarettes in Cambodia were illicit, costing the government 13.2 billion riel ($3.3 million), the highest level recorded since the Asia Illicit Tobacco Indicator research programme first included Cambodia in 2013.

A study by research network SSRN found that a 10 per cent rise in the price of legal cigarettes, which might result from a tax increase, leads to a 3.6 per cent increase in the illegal share of the market.

Malaysia increased excise taxes on tobacco in 2016, substantially leading to increased illicit trade and tax avoidance. According to the New Straits Times, more than 65 per cent of the cigarettes in Malaysia are illicit, costing RM5 billion ($1.2 billion) in excise revenue.

Due to a sudden price increase due to sharp taxation, smokers often turn to cheaper illicit options creating an environment ripe for criminal organisations.

Over the past two years, agencies of affected countries have caught shipments originating from Cambodia.

SHINE reported in October 2020 that police caught 43 suspects in connection with a 400 million yuan ($59.5 million) counterfeit cigarettes case in Shanghai’s largest cross-border crackdown of its kind. They were suspected of making counterfeit cigarettes of high-end brands such as Chunghwa, Peony and Panda in Cambodia and smuggling them to China with the intention of selling them across the country.

The Phnom Penh Post in June 2020 reported that the Ministry of Interior’s Anti-Counterfeit Products Department raided an illicit cigarette production location in Kampong Speu province and seized 1,000 cigarette packets, two cigarette producing machines and other equipment. The governor said the cigarettes were manufactured for export to China.

An illegal tobacco infrastructure in Cambodia already exists to support smuggling to nearby markets such as China, Vietnam, Thailand and India, and we are fortunate that these criminal organisations have not yet shifted their operations to the local market.

With a significant tax increase, the government will be adding fuel to the fire of illicit tobacco and encouraging criminals to direct their attention to the domestic market.

International experience shows that sudden and steep tax increases are counter-productive – governments risk losing tax revenues as legal products become unaffordable and consumers shift to cheaper, often illegal products marketed by criminals, without successfully achieving significant health objectives.

Taking a stable and long-term approach to taxation policy, together with strict enforcement, best meets government objectives to raise sustainable tax revenues, while public education on the effects of smoking and a healthy lifestyle contributes to achieving public health policy.

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