Taxation system on ad valorem tax, specific tax and value added taxes -

Taxation system on ad valorem tax, specific tax and value added taxes

Significant increases in the taxes and prices of tobacco products is the most cost effective measure to reduce tobacco use. This, combined with other tobacco control measures, such as advertising bans and public smoking prohibitions help ensures the effectiveness of tobacco control demand reduction measures.

Evidence from countries of all income levels shows that price increases on cigarettes are highly effective in reducing demand. Higher prices encourage cessation and prevent initiation of tobacco use. They also reduce relapse among those who have quit and reduce consumption among continuing users. On average, a 10% price increase on a pack of cigarettes would be expected to reduce demand for cigarettes by about 4% in high-income countries and by about 5% in low- and middle-income countries, where lower incomes tend to make people more sensitive to price changes. Children and adolescents are also more sensitive to price increases than adults, allowing price interventions to have a significant impact on this age group.

Article 6 of the WHO Framework Convention on Tobacco Control, “Price and Tax Measures to Reduce the Demand for Tobacco”, recognizes the importance of this policy and calls on governments to implement tax and price policies to contribute to their national health objectives.

Most governments levy taxes on tobacco products, including excise taxes, value added taxes (VAT) or general sales taxes and import duties. Of these, tobacco-product excise taxes are most important for achieving the health objective of reduced tobacco consumption since they are uniquely applied to tobacco products and raise their prices relative to the prices of other goods and services.

There are two types of excise taxes – specific and ad valorem. A specific excise tax is levied based on quantity (e.g. a fixed amount per cigarette or weight of tobacco), while an ad valorem excise is levied based on value (e.g. a percentage of the factory price or retail price). Both types of excises have their strengths and weaknesses (see WHO technical manual on tobacco tax administration, section 2.4). The ideal level and possible combination of both depends on the situation of the country.

The experiences with the variety of taxes and changes in taxes and tax structures applied to tobacco products around the world, supported by economic theory, provide an extensive evidence-base for identifying best practices in tobacco taxation. These include the following:

  • Simpler is better. Specific excise tax structures tend to increase average retail prices more than ad valorem excise tax structures.
  • Implement tax increases regularly to account for inflation and income effects so as to reduce the affordability of tobacco products
  • Apply equivalent taxes to all tobacco products to minimize the incentives for tobacco users to switch to cheaper brands or products in response to tax increases
  • Strengthen tobacco tax administration to reduce opportunities for tax avoidance and tax evasion.

Tax structures with a high specific tax component will have the greatest public health impact, while at the same time produce a more stable, reliable stream of tax revenues. It will be most effective when combined with strong tax administration, including the use of a state-of-the art monitoring, tracking and tracing system that includes high-tech tax stamps and licensing of all involved in the production and distribution of tobacco products, coupled with adequate enforcement and swift, severe penalties on violators.

The WHO is committed to helping governments design intelligent tobacco tax policy that best satisfies these dual goals of tobacco use reduction and revenue generation. An additional benefit of greater revenues through tobacco taxes is the possibility of generating an additional pool of funding for health, a practice recommended by the WHO and being adopted with increasing frequency by countries around the globe.

To read with source link of WHO Please click the link:

https://www.who.int/tobacco/economics/taxation/en/#:~:text=A%20specific%20excise%20tax%20is,factory%20price%20or%20retail%20price).&text=Strengthen%20tobacco%20tax%20administration%20to,tax%20avoidance%20and%20tax%20evasion.