2015 Tobacco Tax Reform in China:Results and Challenges
Rong Zheng
Director, WHO Collaborating Center for Tobacco and Economics
Professor, University of International Business and Economics (UIBE), Beijing, China
WINNING THE TAX WARS TAX COOP 2016
23-24, May, 2016
World Bank, Washington, DC
CONTENTS
1. The Tobacco Industry and Market in China
2. The 2015 Tobacco Tax Reform
3. China Tobacco Tax Structure
4.The Implementation and Impact of the 2015 Tobacco Tax Reform
5. Future Reforms and Challenges
2016/6/2 2
• 1. Tobacco industry and cigarette market in China
China is the largest producer and consumer of tobacco products in the world, where thirty percent of the world’s
cigarettes are consumed.
China’s tobacco industry is regulated by The State Tobacco Monopoly Administration (STMA), a state-owned monopoly
who is in charge of enforcing related policies for tobacco and cigarette products in China. China National Tobacco
Corporation (CNTC), a state-owned enterprise who is in charge of farming, production, distribution, sales, and marketing
of all tobacco products in China.
In 2015, STMA has 33 provincial branches while CNTC has 19 provincial branches with 94 cigarette manufacturers with
locations in 29 provinces in China except Tibet and Qinghai province.
In 2015, CNTC produces 89 cigarette family brands, within each brand there are multiple varieties differing in terms of
price, packaging and quality. As a result, the 89 family brands provide 870 different domestic cigarettes available in the
market with the price variation between 2.5RMB (0.4 USD)per pack to 100RMB(15.4USD) per pack. 2016/6/2 3
Table 1 The 2015 cigarette excise tax adjustment
Before May 10, 2015 After May 10, 2015
At Producer price level
Specific excise tax (per pack) 0.06 RMB 0.06 RMB
Ad valorem tax
>= 7 RMB 56% 56%
< 7 RMB 36% 36%
At Wholesale price level
Specific excise tax (per pack) 0 0.10 RMB
Ad valorem tax 5% 11%
Excise tax rate at the wholesale segment was increased from 5% to 11%;
An additional specific tax of 0.1RMB (0.015USD) per pack (with 20 sticks) was introduced at the
wholesale level.
STMA price announcement responding to tax adjustment: Wholesale price has increased by 6%;
STMA provincial branches can set up cigarette retail price in the province based on local market under STMA retail
price guidance and at the same time need to meet the required principle that the retailer’s profit margin shouldn’t be lower
than 10%.
Both new cigarette tax and pricing policy are effective from May 10, 2015.
2016/6/2 4
• 2. 2015 Tobacco Tax Reform
Table 2 China tobacco tax structure
Type of Tax Tax level tax base Tax Rate Revenue Beneficiary
Tobacco leaf tax agriculture value of tobacco
leaf
20% 100% local government
Value-added tax at
cigarette manufacture
(VAT)
produce,wholesal
e and retail
added value at
each level
17% 75% central government
25% local government
Specific excise tax produce 0.06
RMB/pack
100% central
government
wholesale 0.10RMB/pack
Ad valorem excise tax produce,
wholesale
allocation
price(without
VAT)
≥ 70 RMB per
carton
56%
< 70 RMB per
carton
36%
wholesale 11%
Urban maintenance and
construction tax and extra
charges of educational fee
( C&E Tax)
produce,
wholesale, retail
tax amount of
VAT and excise
tax
12% in average
100% local government2016/6/2 5
3. China Tobacco Tax Structure
• Cigarette pricing mechanism in China
2016/6/2 6
Allocation Price Wholesale Price Retail Price
A A(1+a) A(1+a) (1+b)
Figure 1:Cigarette Pricing Mechanism in China
Pr = 𝐴 × 1 + 𝑎 × 1 + 𝑏 × 1 + 𝑅𝑡𝑣𝑎𝑡 (1
4. Methodology: WHO TaXSiM model
Use 5 cigarettes as representative brands for 5 classifications of 870 different kind of cigarettes on the market with 150 brand families.
Criteria of choosing representatives: • The selected brand has a large market share in each cigarette category and, • The allocation price of the representative cigarette is the median or very close to the median allocation price in each
category• All calculations and simulations are based on the 5 representative cigarettes
Data (2001-2015)
Tobacco industry data are retrieved from China Tobacco Almanac which includes:
• cigarette output value
• cigarette output volume
• cigarette production volume for each class (Class I, Class II, Class III, Class IV, Class V)– market share of each class
• cigarette wholesale profit margin
• cigarette price data (including allocation price, wholesale price and retail price for each class of representative brand and specification) is retrieved from annual cigarette allocation plan
2016/6/2 7
• 5. Impact so far? #1 – Price
2016/6/2 8
Table 3 Impact on Prices
Class Class I
(Premium)
Class I
(Average)Class II Class III Class IV Class V Total in average
Wholesale price
(RMB/pack)
2014 36.00 20.60 11.60 8.30 4.50 2.25 10.27
2015 38.16 21.84 12.30 8.80 4.77 2.39 11.18
△ 2.16 1.24 0.70 0.50 0.27 0.14 0.92
△ % 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 8.9%
Retail price
(RMB/pack)
2014 43.00 23.00 13.00 9.50 5.00 2.50 11.61
2015 45.00 25.00 14.00 10.00 5.50 3.00 12.81
△ 2.00 2.00 1.00 0.50 0.50 0.50 1.19
△ % 4.65% 8.70% 7.69% 5.26% 10.00% 20.00% 10.3%
• 5. Impact so far? #2 – Tax as % of retail price (Tax incidence)
Table 4 Tax as % of retail price
Class
Class I
(Premiu
m)
Class I
(Average
)
Class II Class III Class IV Class VTotal in
average
Total tax
as% of
retail price
2014 52% 55.40% 58.50% 44.82% 47.23% 53.72% 52%
2015 55% 58.84% 61.73% 50.37% 52.22% 55.98% 56%
△3%
3.44% 3.23% 5.55% 4.99% 2.25% 4%
Total excise
as% of
retail price
2014 36% 38.68% 40.66% 27.47% 28.91% 33.37% 35%
2015 39% 42% 45% 33% 34% 36% 39%
△3%
3.48% 4.07% 5.61% 5.19% 2.95% 4%
2016/6/2 9
2016/6/2 10
55%58%
45%47%
54%52%
59%62%
50%52%
56% 56%
0%
10%
20%
30%
40%
50%
60%
70%
Class I Class II Class III Class IV Class V Total in average
2014 2015
Figure 2 Tax as % of retail price
Data source: WHO Tobacco control country profiles
http://www.who.int/tobacco/surveillance/policy/country_profile/en/
0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%
50%
64.4% 62.0%
73.1%
53.4% 55.4%
74.3%66.2%
41.6%
60.4%
Taxes as % of retail price of the most sold cigarette brand
Figure 3 Tax as % of retail price—Compared with Asian countries
2016/6/2 11
• 5. Impact so far? #3 Impact on market sales
Table 5 Impact on market sales
Simulated Actual
price elasticity -0.4 -0.22
Retail price 2014 RMB/pack 11.31 11.31
Retail price 2015 RMB/pack 12.50 12.50
△(price) RMB/pack 1.19 1.19
%△(price) % 10.53% 10.53%
%△(sales volume) % -4.21% -2.36% (-3.3% 1 year )
△(sales volume) billion packs -5.37 -3.01
Sales volume 2014 billion packs 127.476 127.476
Sales volume 2015 billion packs 122.11 124.47
2016/6/2 12
• 5. Impact so far? #4 – Impact on market structure
2016/6/2 13
20.10%
10.37%
44.96%
18.20%
6.37%
21.39%
11.73%
44.02%
16.99%
5.87%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Class I Class II Class III Class IV Class V
Figure 4 Market share change 2014-2015
2014
2015
2016/6/2 14
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure 5 Cigarette Market Share (2007-2015)
Class V
Class IV
Class III
Class II
Class I
Year
2016/6/2 15
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Figure 6 Market Share May 2015-March 2016
ClassⅠ
ClassⅡ
ClassⅢ
ClassⅣ
ClassⅤ
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Figure 6 Market Share May 2015-March 2016
ClassⅤ
ClassⅣ
ClassⅢ
ClassⅡ
ClassⅠ
In the first quarter of 2016, the market share of middle and up price cigarettes has been reduced, while the cheapest cigarette market share has been increased by 6%, which indicates smokers switching down.
Table 6 Impact on government’s revenue
Tobacco
tax and
profit
Tobacc
o tax
Tobacco
industry
profit
Tax and profit
contribution
to central
gov’t
Profit
before
income
tax
Corperat
e income
tax
SOE profit
contribution
rate
SOE
profit
contribut
ion
Addition
al
contribu
tion
Additional
excise
contributio
n
Billion
USD
Billion
USD
Billion
USD Billion USD
Billion
USD
Billion
USD %Billion
USD
Billion
USD
Billion
USD
2014 161.81 118.43 43.38 140.16 33.83 8.46 25% 6.34 6.92
2015 175.94 129.29 46.65 168.46 39.14 9.79 25% 7.34 13.15 8.89
△ 9% 8%
Exchange rate: 1USD=6.5CNY
2016/6/2 16
5. Impact so far? #5 Impact on government’s revenue
In the long term:
To increase tobacco tax and price persistently;
To introduce indexation management to tobacco excise tax policy with the aim to keep the affordability in a certain level
In 2016:
The central government requests additional 12.3 billion USD revenue from tobacco industry on the basis of 2015;
Cigarette production, consumption, tax revenue in the first quarter of 2016 have been decreased compared with the first quarter of 2015;
Another tax hike is expected to happen this year.
2016/6/2 17
6. Future reforms
7. Challenges
(1) The objectives of tobacco tax policy To generate revenues for the government budget.
To reduce tobacco consumption on health grounds;
Tobacco tax hike propaganda should put priority on public health to win support from general public.
(2) Earmarking plays a key role in sustainable tobacco control strategy.
(3) Governments have additional objectives, such as: Supporting the agriculture sector
Encouraging investment and employment in manufacturing and distribution activities
Concerns for the pool and low social and economic groups.
Research in these fields is fundamental to provide supporting evidence to promote tax hike.
(4) Fiscal experts should play a leading role. They have the knowledge and capacity to develop draft guidelines which frames the country’s circumstance while do not infringe tax sovereignty.
2016/6/2 18
Top Related