WHO suggests solutions to cigarette smuggling in Vietnam
Tobacco kills more than 7 million people a year. The World Health Organization (WHO) is committed to stop the tobacco epidemic and make the world tobacco free. Raising taxes on tobacco is the single most effective tobacco demand reduction measure.
However, in order to maintain and maximize profits from this harmful products, tobacco industry always tries to weaken, delay and water down tobacco tax increase.
An argument frequently used by tobacco industry is that raising tobacco tax will lead to the increase of the illicit tobacco trade (smuggling) and government revenue loss. This is also the argument they use in Viet Nam.
In fact, in Viet Nam this argument is not correct. The cigarette smuggling in Viet Nam is actually due to two main reasons below:
The first reason: Cigarettes are smuggled into Vietnam to avoid import tax.
There is a need to distinguish between import taxes, which are applied only to imported cigarettes and other taxes like excise and value added tax (VAT) which are applied to all cigarettes. The Viet Nam government is maintaining high import tax in order to reduce the import and consumption of foreign cigarettes.
Import tax rates are now 135% of import prices. After the import tax is applied, the excise tax and VAT will be applied on top. Thus according to our calculations, if a pack with the original import price of 10 thousand VND, then after applying the import and other taxes, the selling price will be at over 50 thousand VND per pack.
The high import tax rate make it difficult for the legally import cigarettes to compete in term of price, thus providing an incentive for smuggling foreign cigarettes.
So, even if the excise tax is low or high there will still be strong motivation to smuggle cigarettes to avoid import and other taxes.
The second reason: due to user habits, smokers like to use some illicit brands (also known as "taste")
The taste is reflected in these 4 points:
Firstly, results of the survey of tobacco consumption in 12 provinces in Vietnam, conducted by the University Trade in 2012 showed that 70% of users of smuggled cigarettes said that it is due to taste, curiosity, or invited by a friend.
Secondly, according to the reports from the Viet Nam Tobacco Association, in recent years about 80-90% of the smuggled cigarettes belong to the two brands named Jet and Hero. These brands have high level of tar and nicotine and are more suitable with heavy smokers.
Thirdly, these brands are mostly used in two southern regions in Viet Nam. According to the GATS 2015 survey, nearly 92% of Jet and Hero brand are consumed by smokers from the Southeast East and the South West.
Especially, about 75% of the consumption of these 2 brands take place within 10 provinces and cities in these areas, including: Binh Thuan, Tay Ninh, Ho Chi Minh City, Long An, Vinh Long, Dong Thap, An Giang, Kien Giang, and Can Tho.
Two locations that have the highest level of illicit cigarette consumption are Ho Chi Minh City (20.6% of consumption) and An Giang (13.2% of consumption). Thus, the presence of illicit cigarettes is highly concentrated in just a few areas.
Fourthly, smokers of smuggled cigarettes are willing to pay higher price for smuggled brands than the domestically produced brands.
According to the GATS 2010 survey the average price of Hero and JET are 30% to 60% higher than the average price of other legal tobacco brands in Viet Nam.
International experience:
The above showed that cigarette smuggling in Viet Nam is not an issue of low or high excise tax rate. This is also shown in the international experience.
WHO analysed data from 76 countries and found that those countries with low cigarette prices, smuggling is often at higher level compare to the countries with high tax and price.
Moreover, many countries have showed that they can keep smuggling of cigarettes low even when they increase excise tax at high level.
For example, in Italy, cigarette smuggling was estimated at a high level (13%) in 1992. The government decided to increased tobacco excise tax three times during 1993-2000 to increased excise tax rate to 75.2% of retail price. At the same time, to combat smuggling, the Italian government implemented several measures, including introducing barcodes on cigarette packs to help detect illicit cigarettes; adopting legislation treating tobacco smuggling like other serious crimes; and increased control over the Italian coast and additional surveillance by enforcement authorities, which were given increased powers and logistic and technical support. The Italian government also strengthened its cooperation with the EU. These efforts paved the way for law enforcement and judicial authorities to tackle the issue of tobacco smuggling efficiently and effectively. As result, the rate of smuggled cigarettes was brought down to about 3% in 2000 and maintained at this level since then.
In ASEAN countries, we can also see good examples. Philippines increased tobacco tax year by year from 2013 to 2017, which helped increase tobacco tax revenue by 300%. In the same time, there is no significant increase in cigarettes smuggling. Thailand increase tobacco tax 12 times (every 1 or 2 years on average) during 1993-2015. Tobacco tax revenue increase by 400% but there is no problem with tobacco smuggling.
Most importantly, even if there is smuggling, increase tobacco tax can still help countries to achieve the desired outcomes: reduce consumption and increase government tax collection from tobacco.
Effective solutions to control smuggling in Viet Nam
Firstly, Viet Nam should consider to ratified the protocol to eliminate the illicit trade in tobacco products. This is a protocol under the WHO Framework Convention on Tobacco Control which Viet Nam has ratified since 2004. So far, 53 countries have signed the protocol and 33 countries have ratified it. The protocol is estimated to enter into force by 2018 after it is ratified by 40 countries.
The treaty aims at eliminating all forms of illicit trade in tobacco products. It provides tools for preventing illicit trade by securing the supply chain, including by establishing an international tracking and tracing system, and a suite of measures to enable international cooperation.
Secondly, Viet Nam should strengthen enforcement of smuggling control both at the border gates and at points of sales. Especially, to effectively control cigarettes smuggling in Vietnam the authorities should focus on the 10 provinces mentioned above.
Dr Tedros Adhanom Ghebreyesus, WHO Director-General said "Governments around the world must clamp down on the illicit tobacco trade, which is exacerbating the global tobacco epidemic and its related health and socioeconomic consequences.”
Thirdly, Vietnam should cooperate with neighbouring countries, which are being used as transit hub to introduce illicit cigarettes in Vietnam. Initial steps should be interchange of information about tobacco imports, trade and tax data and collaboration on controlling tobacco smuggling at border gates areas.
Dr Kidong Park, Head of Representative of WHO in Vietnam
Dr Kidong Park, Head of Representative of WHO in Vietnam
However, in order to maintain and maximize profits from this harmful products, tobacco industry always tries to weaken, delay and water down tobacco tax increase.
An argument frequently used by tobacco industry is that raising tobacco tax will lead to the increase of the illicit tobacco trade (smuggling) and government revenue loss. This is also the argument they use in Viet Nam.
In fact, in Viet Nam this argument is not correct. The cigarette smuggling in Viet Nam is actually due to two main reasons below:
The first reason: Cigarettes are smuggled into Vietnam to avoid import tax.
There is a need to distinguish between import taxes, which are applied only to imported cigarettes and other taxes like excise and value added tax (VAT) which are applied to all cigarettes. The Viet Nam government is maintaining high import tax in order to reduce the import and consumption of foreign cigarettes.
Import tax rates are now 135% of import prices. After the import tax is applied, the excise tax and VAT will be applied on top. Thus according to our calculations, if a pack with the original import price of 10 thousand VND, then after applying the import and other taxes, the selling price will be at over 50 thousand VND per pack.
The high import tax rate make it difficult for the legally import cigarettes to compete in term of price, thus providing an incentive for smuggling foreign cigarettes.
So, even if the excise tax is low or high there will still be strong motivation to smuggle cigarettes to avoid import and other taxes.
The second reason: due to user habits, smokers like to use some illicit brands (also known as "taste")
The taste is reflected in these 4 points:
Firstly, results of the survey of tobacco consumption in 12 provinces in Vietnam, conducted by the University Trade in 2012 showed that 70% of users of smuggled cigarettes said that it is due to taste, curiosity, or invited by a friend.
Secondly, according to the reports from the Viet Nam Tobacco Association, in recent years about 80-90% of the smuggled cigarettes belong to the two brands named Jet and Hero. These brands have high level of tar and nicotine and are more suitable with heavy smokers.
Thirdly, these brands are mostly used in two southern regions in Viet Nam. According to the GATS 2015 survey, nearly 92% of Jet and Hero brand are consumed by smokers from the Southeast East and the South West.
Especially, about 75% of the consumption of these 2 brands take place within 10 provinces and cities in these areas, including: Binh Thuan, Tay Ninh, Ho Chi Minh City, Long An, Vinh Long, Dong Thap, An Giang, Kien Giang, and Can Tho.
Two locations that have the highest level of illicit cigarette consumption are Ho Chi Minh City (20.6% of consumption) and An Giang (13.2% of consumption). Thus, the presence of illicit cigarettes is highly concentrated in just a few areas.
Fourthly, smokers of smuggled cigarettes are willing to pay higher price for smuggled brands than the domestically produced brands.
According to the GATS 2010 survey the average price of Hero and JET are 30% to 60% higher than the average price of other legal tobacco brands in Viet Nam.
International experience:
The above showed that cigarette smuggling in Viet Nam is not an issue of low or high excise tax rate. This is also shown in the international experience.
WHO analysed data from 76 countries and found that those countries with low cigarette prices, smuggling is often at higher level compare to the countries with high tax and price.
Moreover, many countries have showed that they can keep smuggling of cigarettes low even when they increase excise tax at high level.
For example, in Italy, cigarette smuggling was estimated at a high level (13%) in 1992. The government decided to increased tobacco excise tax three times during 1993-2000 to increased excise tax rate to 75.2% of retail price. At the same time, to combat smuggling, the Italian government implemented several measures, including introducing barcodes on cigarette packs to help detect illicit cigarettes; adopting legislation treating tobacco smuggling like other serious crimes; and increased control over the Italian coast and additional surveillance by enforcement authorities, which were given increased powers and logistic and technical support. The Italian government also strengthened its cooperation with the EU. These efforts paved the way for law enforcement and judicial authorities to tackle the issue of tobacco smuggling efficiently and effectively. As result, the rate of smuggled cigarettes was brought down to about 3% in 2000 and maintained at this level since then.
In ASEAN countries, we can also see good examples. Philippines increased tobacco tax year by year from 2013 to 2017, which helped increase tobacco tax revenue by 300%. In the same time, there is no significant increase in cigarettes smuggling. Thailand increase tobacco tax 12 times (every 1 or 2 years on average) during 1993-2015. Tobacco tax revenue increase by 400% but there is no problem with tobacco smuggling.
Most importantly, even if there is smuggling, increase tobacco tax can still help countries to achieve the desired outcomes: reduce consumption and increase government tax collection from tobacco.
Effective solutions to control smuggling in Viet Nam
Firstly, Viet Nam should consider to ratified the protocol to eliminate the illicit trade in tobacco products. This is a protocol under the WHO Framework Convention on Tobacco Control which Viet Nam has ratified since 2004. So far, 53 countries have signed the protocol and 33 countries have ratified it. The protocol is estimated to enter into force by 2018 after it is ratified by 40 countries.
The treaty aims at eliminating all forms of illicit trade in tobacco products. It provides tools for preventing illicit trade by securing the supply chain, including by establishing an international tracking and tracing system, and a suite of measures to enable international cooperation.
Secondly, Viet Nam should strengthen enforcement of smuggling control both at the border gates and at points of sales. Especially, to effectively control cigarettes smuggling in Vietnam the authorities should focus on the 10 provinces mentioned above.
Dr Tedros Adhanom Ghebreyesus, WHO Director-General said "Governments around the world must clamp down on the illicit tobacco trade, which is exacerbating the global tobacco epidemic and its related health and socioeconomic consequences.”
Thirdly, Vietnam should cooperate with neighbouring countries, which are being used as transit hub to introduce illicit cigarettes in Vietnam. Initial steps should be interchange of information about tobacco imports, trade and tax data and collaboration on controlling tobacco smuggling at border gates areas.
Dr Kidong Park, Head of Representative of WHO in Vietnam
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