The House of Representatives has approved on second reading a bill designed to rationalize excise tax rates on tobacco and vapor products, aiming to halt the decline in excise tax collections due to illicit trade.
Nueva Ecija Rep. Mikaela Suansing
Nueva Ecija Rep. Mikaela Suansing emphasized that if passed, the bill could lead to an "aggregate revenue recovery of P66 billion across five years."
In her sponsorship of House Bill 11360, Suansing pointed out that while the 2013 Sin Tax Law initially succeeded in reducing smoking rates and boosting revenue until 2021, excise tax revenue collections have since declined annually.
She noted that collections dropped from P176 billion in 2021 to P160 billion in 2022 and further declined to P135 billion in 2023. Meanwhile, the number of adult smokers rose to 23.2% in 2023 from 18.5% in 2021, driven by the increasing prevalence of illicit trade.
"Illicit cigarettes pose a serious threat to peace and order as they fund illegal activities," Suansing said.
Deputy Speaker and Ilocos Sur Rep. Kristine Singson-Meehan, a co-sponsor of the bill, said, "The increasing tax rate is no longer effective in reducing smoking rates."
Citing a study by the Food and Nutrition Research Institute (FNRI), she highlighted that adult smoking prevalence had risen, while adolescent smoking prevalence had doubled from 2.3% in 2021 to 4.8% in 2023.
She further pointed out that legal tobacco volume and revenue collections continue to "decline despite yearly tax increases," while "illicit trade is continuing to increase."
Meehan also added, "More than 2 million Filipinos depend on tobacco for their livelihood. Declining government collections affect government revenue and reduce funding for national health programs and infrastructure development.
Cagayan de Oro City Rep. Rufus Rodriguez, another co-sponsor, expressed concern over the strain illicit trade has placed on the objectives of the Sin Tax Law.
"The objectives of the Sin Tax Law, which are to raise government revenues and protect public health, have come under immense strain from illicit trade, and I’m very much concerned because Mindanao is the first island so much affected by illicit trade," Rodriguez said.
He stressed that lost revenues due to illicit trade have negatively impacted funding for health programs under the Universal Health Care Law.
"To address this issue, it is imperative for the government to recalibrate its existing revenue measures and ensure our tax laws do not unduly incentivize, nor give premium to, illicit traders at the expense of legitimate businesses," he stated.
"While it is in the country's legitimate interest to impose higher taxes on sin products, we need to be cognizant of its unintended consequences," Suansing added.
Under the proposed measure, tax rates will increase by 2% every even-numbered year starting January 1, 2026, and by 4% every odd-numbered year starting January 1, 2027. These increases will continue until December 31, 2035. To prevent frontloading, the Department of Finance, in consultation with the Bureau of Internal Revenue, will establish a reasonable threshold for removals.
The bill also grants the President the authority, upon recommendation from the Secretary of Finance, to increase the tax rate to 5% if the actual national government deficit exceeds the programmed deficit equivalent to 2% of the gross domestic product of the previous year.
After a decade, a review will be conducted to assess the tax’s impact on revenue collections, health costs, and smoking prevalence.
Rodriguez also emphasized that the bill seeks to combat rampant misdeclaration of vapor products to evade taxes.
"In vapor products, these unscrupulous producers misdeclare their kind of vapor product," he said.
He explained that some producers declare nicotine salt products as freebase nicotine, which has a lower tax rate under the current law, underscoring the need for a unified tax rate on both types.
"Illicit traders capitalize on such regulatory gaps to evade higher taxes imposed on certain nicotine varieties, ultimately undermining public health efforts and fair market practices," Rodriguez added.
If enacted, the measure will raise current tax rates on vapes and heated tobacco products. Vapor products containing any liquid substance, regardless of nicotine content—including nicotine-free liquids—will be subject to an increased and unified tax of P66.15 per milliliter, the same rate as a cigarette pack of 20 sticks. Heated tobacco products will see a 15% excise tax increase from P35 to P41 per pack of 20 sticks.
Under existing law, tax rates for cigarettes, heated tobacco products, and vapor products increase by 5% annually.