Recent “sin tax” backfires on Thailand’s tobacco monopoly

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A new excise tax (dubbed “sin tax”) on cigarettes, alcoholic beverages, sugary drinks, coffee drinks and tea drinks, imposed in September this year in Thailand, could painfully backfire for the Thai government as state-owned Thailand Tobacco Monopoly claimed it significantly lost market share due to the poor design and law enforcement of the new tax regime.

If the rules do not change, the company, which employs close to 4,000 people and buys raw material from 20,000 farmers, might even go bankrupt, Thailand Tobacco managing director Daonoi Suttiniphapunt told media in Bangkok on November 27.

She said that the tax burden had risen disproportionately compared to that of foreign producers. While Thailand Tobacco had to increase its state-set retail prices, big cigarette importers lowered their prices of some popular product lines to directly compete with domestic cigarettes, which by many smokers are considered being of inferior quality.

The new tax rate is 20 per cent for a cigarette pack with a basic retail price of no more than 60 baht and 40 per cent for higher priced packs. There is also a 1.20-bath tax on each cigarette stick. Foreign brands lowered their basic retail prices to below 60 baht to benefit from the regulations.

This is not illegal, but could be subject to scrutiny by the Excise Department and found to be a dumping price strategy by foreign brands to increase sales and market share. However, Daonoi said that law enforcement in this particular case is poor and the loopholes so wide open that the whole new tax system is to the very disadvantage of Thailand Tobacco and eventually for state revenues.

Within a month of the new taxing structure going into force, the market share of the Thailand Tobacco dropped sharply from 80 per cent to 65.9 per cent, Daonoi said. The share held by the foreign brands rose accordingly from 20 per cent to more than 30 per cent at the expense of Thailand Tobacco, she added. Overall, sales dropped by 41 per cent in the period to the advantage of foreign brands.

Originally, Somchai Poonsawat, director-general of Thailand’s Excise Department, expected that the tax hike should bring new inflow of about 12 billion baht ($360 million) into state coffers per year.

However, Daonoi warned that Thailand Tobacco has started to lose money and this could lead to transfers to government coffers drying up next year. The government may lose revenue of eight billion baht in 2018, which would reduce the monetary effects of the new “sin tax” for the government to a mere four billion baht ($120 million), but has reduced buying power for less well-off people in Thailand and redirected profits out of the country to multinational tobacco companies.

The labour union said it clearly foresaw a sharp drop in the market share of local cigarette brands in the future and brought this to the attention of the government, but to no avail.

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Reading Time: 2 minutes

A new excise tax (dubbed “sin tax”) on cigarettes, alcoholic beverages, sugary drinks, coffee drinks and tea drinks, imposed in September this year in Thailand, could painfully backfire for the Thai government as state-owned Thailand Tobacco Monopoly claimed it significantly lost market share due to the poor design and law enforcement of the new tax regime.

Reading Time: 2 minutes

A new excise tax (dubbed “sin tax”) on cigarettes, alcoholic beverages, sugary drinks, coffee drinks and tea drinks, imposed in September this year in Thailand, could painfully backfire for the Thai government as state-owned Thailand Tobacco Monopoly claimed it significantly lost market share due to the poor design and law enforcement of the new tax regime.

If the rules do not change, the company, which employs close to 4,000 people and buys raw material from 20,000 farmers, might even go bankrupt, Thailand Tobacco managing director Daonoi Suttiniphapunt told media in Bangkok on November 27.

She said that the tax burden had risen disproportionately compared to that of foreign producers. While Thailand Tobacco had to increase its state-set retail prices, big cigarette importers lowered their prices of some popular product lines to directly compete with domestic cigarettes, which by many smokers are considered being of inferior quality.

The new tax rate is 20 per cent for a cigarette pack with a basic retail price of no more than 60 baht and 40 per cent for higher priced packs. There is also a 1.20-bath tax on each cigarette stick. Foreign brands lowered their basic retail prices to below 60 baht to benefit from the regulations.

This is not illegal, but could be subject to scrutiny by the Excise Department and found to be a dumping price strategy by foreign brands to increase sales and market share. However, Daonoi said that law enforcement in this particular case is poor and the loopholes so wide open that the whole new tax system is to the very disadvantage of Thailand Tobacco and eventually for state revenues.

Within a month of the new taxing structure going into force, the market share of the Thailand Tobacco dropped sharply from 80 per cent to 65.9 per cent, Daonoi said. The share held by the foreign brands rose accordingly from 20 per cent to more than 30 per cent at the expense of Thailand Tobacco, she added. Overall, sales dropped by 41 per cent in the period to the advantage of foreign brands.

Originally, Somchai Poonsawat, director-general of Thailand’s Excise Department, expected that the tax hike should bring new inflow of about 12 billion baht ($360 million) into state coffers per year.

However, Daonoi warned that Thailand Tobacco has started to lose money and this could lead to transfers to government coffers drying up next year. The government may lose revenue of eight billion baht in 2018, which would reduce the monetary effects of the new “sin tax” for the government to a mere four billion baht ($120 million), but has reduced buying power for less well-off people in Thailand and redirected profits out of the country to multinational tobacco companies.

The labour union said it clearly foresaw a sharp drop in the market share of local cigarette brands in the future and brought this to the attention of the government, but to no avail.

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