What can the government do with P3 billion?

Certainly a lot more hospitals, classrooms and public infrastructure that would benefit the Filipino people for generations. Yet illicit tobacco trade continues to rob citizens of these societal benefits. 

The government has sounded the proverbial alarm bells. With still more than a month before the year 2024 ends, Philippine authorities already seized over 1.1 billion sticks of illicit cigarettes in coordinated raids across the country since January. This number translates to P3.5 billion of lost government revenues when computed at an excise tax rate of P63 per pack — a historic haul that has nearly doubled the 599 million sticks seized in 2023.

The seizure has renewed attention on the thriving black market for tobacco in the Philippines, where the trade’s sprawling reach continues to undercut public health efforts and cost the government critical revenues. This is a painful blow to public finances already strained by the demands of mounting healthcare and infrastructure costs. 

The country’s porous borders, once used as means to facilitate open trade, have enabled criminal syndicate groups to organize at scale and sidestep scrutiny from regulatory authorities

Exploiting loopholes in enforcement mechanisms and rampant corruption in certain branches of the government, the tobacco black market has entrenched itself deeply in the Philippines. As prices soar for legitimate brands, cheap counterfeit and smuggled options have become the de facto choice for millions of smokers, especially among the country’s low-income smokers. 

The hidden price of illicit tobacco

Each year, the Philippines loses billions of pesos in potential revenue to untaxed tobacco. Under the country’s “sin tax” law, excise taxes on cigarettes have steadily increased as a means of curbing smoking and funding healthcare, climbing to P63 per pack in 2024. But the higher taxes have had an unintended effect: Creating a prime opportunity for smugglers to offer their wares at a fraction of the cost of legitimate cigarettes.

The Philippine government lost P25.5 billion in taxes from tobacco smuggling last year, according to the Bureau of Internal Revenue (BIR), as it sought to intensify its enforcement of tax compliance on the tobacco industry.

“[Illegal tobacco] trade has greatly affected our collection on excise taxes on tobacco products,” Venus T. Gaticales, BIR Excise Large Taxpayers Field Operations Division chief, told reporters on the sidelines of a forum. “For last year, [the] collection [for] 2023, compared to 2022 collection, there is a decrease of about P25.5 billion or 15.91 percent.”

The P3.5 billion in lost taxes from the seized billion sticks is only part of a bigger picture. According to Albay Rep. Joey Salceda, the Philippines loses approximately P30 billion annually to smuggled and counterfeit cigarettes. While recent crackdowns like the billion-stick seizure represent progress, they are but isolated victories in a broader struggle, one that pits the government’s ability to tax and regulate against an increasingly savvy network of smugglers.

These “underground sticks” dodge the strict excise tax laws and, as a result, are sold at a fraction of the price of legal brands. Selling as low as P40 per pack compared to the minimum price of P100 pack for legitimate brands, it has become an affordable and appealing option for penny-pinching smokers. But for the government, the loss of revenue is devastating, especially when these funds are crucial for healthcare and poverty alleviation programs.

And the government has every reason to be alarmed. After all, every illicit cigarette that evades taxation chips away at the potential funds that could go towards healthcare, education, or even further anti-smuggling operations.

To combat the market shift, both the Bureau of Customs (BoC) and the Bureau of Internal Revenue have stepped up their surveillance and enforcement efforts, resulting in several notable seizures in the past year. However, some economic experts argue that the increasing prices of legal cigarettes have fueled the growth of the black market. 

Economist and columnist Bienvenido Oplas, president of think tank Minimal Government Thinkers, wrote in his 6 June column: “The major beneficiaries of high tobacco taxation are the smugglers, criminals, terrorists, and their protectors in government. The availability of more illicit tobacco means people are smoking more (cheap, illegal) tobacco, not less. This is actually happening.” 

Oplas illustrates the declining tobacco tax revenues as the tax rate increased. The last time revenues increased the same time as tax rates was in 2021, when at P50/pack, taxes revenues were at P176.5 billion. From 2022 onwards, tax revenues have been decreasing at a steady rate. With tobacco tax revenues at P160.3 billion at a tax rate of P55/pack in 2022, and revenues at P134.9 billion at a tax rate of P60/pack in 2023, Oplas opined that the likely tobacco revenue this year, at the current rate of P63/pack will be somewhere in the vicinity of P120 billion — a whopping 32 percent decline from the 2021 tax take.