Financial Impact of Sin tax Reform Law and its

Expansion to the Stakeholders

SIN TAX
A sin tax is a state-sponsored tax that is added to products or services
that are seen as vices, such as alcohol, tobacco and gambling.
These are levied by governments to discourage individuals from
partaking in such activities without making the use of the products
illegal.
These also provide a source of government revenue.
House Bill 5727 or the Sin Tax Bill
Aims to restructure the existing taxes imposed on alcohol and tobacco
goods.
Duties on these products are a potential revenue source that will help
fund the Universal Health Care Program of the administration.
Flaws in the current system of taxing sin products:
Price Classification Freeze
Multi-tiered Tax Structure
Lack of Price Indexation
Non-compliant with World Trade Organization (WTO) rules
Sin Tax Reforms:
Specific form of excise taxation (e.g., per piece, per pack, per proof
liter)
Automatic annual adjustment of tax rates using relevant NSOestablished tobacco and alcohol indexes after the third year
Raw-material criterion to an alcohol-content criterion in taxing distilled
spirits
Augment the funds for universal health care program

 Continued sharing with tobacco farmers of the incremental revenues

Multi-tiered tax structure to a single tax structure:
For cigarettes, a two-rate structure of P14 and P30 per pack for the 1st
two years, and a uniform rate of P30 per pack of cigarettes on the third
year
For fermented liquor, immediate implementation of unified rate of
P25/liter.
For distilled spirits, a two-year transition period to a unified rate of
P150 per proof liter on the third year.

To Private Entities
One of the issues in the Philippines about tax, is the Sin tax law and its yearly increase
which approve by former President Aquino more than two years ago but it makes more issue to
the public when the House Bill (HB) No. 292, filed by spouses Reps. Horacio P. Suansing, Jr. of
Sultan Kudarats second district and Estrellita B. Suansing of Nueva Ecijas first district seeks to
insert a section in Republic Act No. 8424, or the National Internal Revenue Code of the
Philippines, that will impose a P10 excise tax which will increase by 4% every year thereafter
effective January 1, 2017 through revenue regulations issued by the Finance chief on sugarsweetened beverages per liter of volume capacity. . And now, the Duterte administrations tax
policy reform program included proposals to impose a fatty food tax, a carbon tax, a casino and
lottery tax, mining taxes as well as a luxury tax on cars, jewelry and yachts.
Industries are usually opposed in this reform, but they did not succeed in preventing its
adoption. Based on our research here are some financial impacts to the cash flow of the private
entities

PRIVATE ENTITIES
Means any entity that is not a unit of government, including but not limited to a corporation,
partnership, company, nonprofit organization or other legal entity or a natural person.

OPERATING
Advantages

Large Industries
Expand products for

Small Industries
More production; more

Disadvantages

exportation
Less production;

income;

Due to low demand of the products in the Philippines, industries alternative is to expand it
through exportation.
Some people will replace products by spending on other consumer products or service
with low price, so in this view sales of large entities will decline, while the sales of small
entities will increase.
Although some consumer switch to other product there are also some users that cannot
afford to buy anymore their product, so they will decrease or stop their consumption

INVESTING

Less income - less money to invest or to spend for business expansion and for additional
acquisition of long term assets

FINANCING
Credit line will reduce as the income decreases, the credit worthiness of the industry
will also down. Some of the financing firm will not give the whole loan amount of the
Company.

To the Government
The Philippines has the second highest percentage of smokers in Southeast Asia and
the government has a long history of being favorable to the tobacco industry. Recently new
legislative steps have been approved to restrict tobacco use and ease the effects of smoking on
public health. Studies have shown that tobacco taxes are the most cost effective way to reduce
tobacco consumption. A key benefit of the tough tax regime imposed on tobacco use is
increased revenue to the national health budget.
OPERATING
The Sin Tax Law that the government introduced in 2012 has generated P86.1 billion in
additional revenue over the past four years, marking a 155 percent jump in collections from
2011 to 2015 and helping support social welfare programs, the World Bank said in an analysis,
citing the Philippines as a model for other countries.
Sin tax collections rose to 141.8 billion in 2015, when it accounted for 1 percent of the countrys
gross domestic product (GDP), from 55.7 billion in 2011, before the law took effect.
This tax measure clearly ranks as one of the most decisive and significant policy reforms in the
Philippines in the past decade, it added.

The analysis contained in the Banks latest report, titled Sin Tax Reform in the Philippines:
Transforming Public Finance, Health, and Governance for More Inclusive Development, said the
sin tax law helped the Philippines scale up its health care financing, nearly doubling the
Department of Healths (DOH) budget in the year the law took effect. The DOH budget this year
is three times its 2012 level (in nominal terms), reaching P122.6 billion
No doubt emboldened by the incredible amount of revenue they have earned from the current
sin taxes, it has been proposed that the Sin Tax policy be expanded to include all sweetened
and sugary soft drinks, such as Coca cola and lemonade. The proposal laid out suggests that
the government impose a 10 percent ad valorem tax on all sugary soft drinks and carbonated
beverages that are sold in bottles or other tight containers. The proceeds that the government
would make from this new sin tax would be impressive.

INVESTING
In addition to reducing tobacco use and the associated health burden, tax increases generate
substantial additional revenues to governments. Tax increases are a win-win situation because
they are good for both public health and government revenues. Government revenues raised in
this way can be used for health and other public benefit.
Revenues generated from the sin tax will be used to fund universal health insurance and other
health care initiatives, as well as provide alternative livelihood support in tobacco-producing
areas that will be affected economically by this policy. After deducting the earmarks for tobaccoproducing provinces (as per RA 7171 and RA 8240), 80% of the remaining incremental revenue
is to be allocated to universal health care, acceleration of progress towards the Millennium
Development Goals, and health awareness programs. The remaining 20% is to be allocated for
the improvement of health facilities and medical assistance programs.

From the proposed expansion policy of sin tax, the proceeds should go to a rehabilitation fund
separated apart for the construction of housing, roads, and any other infrastructure problems
created or affected by natural calamities in the country.
FINANCING
Tobacco is grown in 27 provinces throughout the Philippines, with half or more tobacco
production being exported. However, the devoted acreage and quantity of tobacco grown has
been falling in recent decades and tobacco farmers only account for 0.4% of total agricultural
employment.
Cigarette manufacturing decreased following Implementation of RA 10351, the volume of
cigarette and fermented liquor factory removals fell by 15.52% and 11.16% respectively.
Investors will be reluctant to invest due to increased tax rate which consequently affect the

desired rate of return of their investment. Tobacco investors are generating job. Due to RA
10351, there is a decline in the employment of tobacco farmers and our economy will lose a lot.

To the Community
OPERATING

Some consumers shifted to cheaper brands while others decrease their level of
consumption.
Having this increase of tax to the said commodities, it would increase its price and would
encourage consumers to decrease their consumption. The results further revealed that
after implementation of the law, cheaper brands of cigarettes were more patronized
(Migthy, Marvels and Fortune) and brand shifting became evident. Contrastingly,
consumption of liquors appeared to be constant to the major brands except for the
Emperador, who experienced decrease in consumption by the consumers, even with the
implementation of the law. Brand switching especially to cheaper appeared to be popular
actions among smokers and drinkers after the implementation of sin tax law.

prevalence of smoking for those belonging to socio-economic class E or the very poor
dropped from 38 percent in December 2012 to 25 percent in March 2014.
smoking prevalence among those belonging to the 18 to 24 age group was also reduced
from 35 percent in December 2012 to 18 percent in March 2014.
(http://newsinfo.inquirer.net)

Among smokers belonging to socio-economic class ABC, smoking prevalence

went down only from 25 percent in December 2012 to 20 percent in March 2014, while
Class D even went up from 26 percent to 27 percent during the same period.
(http://newsinfo.inquirer.net)
Based on the survey, 45 percent of smokers switched to another brand of cigarettes
when prices increased. (http://newsinfo.inquirer.net)
A survey done by the Social Weather Stations in 2015 showed that the prevalence of
smoking in the country dropped to 25 percent since the sin tax implementation in the
beginning of 2013. (http://www.mb.com.ph)

Decrease in health care costs.

Since the real reason behind the implementation of this law is to discourage the people,
especially the youth to smoke cigarettes and indulge themselves to other vices, many
Filipino lives will be saved. After implementation, the consumers who stop buying sin
products reduce the possibility of developing diseases coming from the use of these
products so therefore the result will be a reduced costs allocated to the medicines to
cure their disease. If the proposed expansion of the Sin Tax Reform Law will be
approved it will also decrease the number of obesity cases in the Philippines.

Filipinos will be given the chance to have a better life.

The increase revenue collected by the government which is allocated to health care
programs which means larger budget will cater the lives of the Filipino people and will be
given the chance to have a better life and be cured of their illnesses.
With an average of 240 Filipinos dying every day from smoking related diseases,
the sin tax is also preventing young people from taking up the deadly habit and
encouraging others to quit. (www.who.int/features/2015/ncd-philippines/en/)

Tobacco farmers may lose their jobs.

Not buying this commodity will result to some of the small firms that produce cigarette
and alcohol to shut down because it could not handle the increased price and
competition due to this law. Shutting down firms would mean that workers will lose their
job and increasing unemployment rate, if no investors will offer jobs to our people.

Liquors consumers maintain the same level and brand preference.

Between cigarettes and alcohol drinks, the latter is the less source of disease and less
patronize because of its price which is relatively high compare to cigarettes. So since
liquors price is already high even without the sin tax, consumers responds indifferently.

INVESTING

Reduces the income of the buyer while quitting smoking means higher income.
This is one of the implications of applying a unitary rate on alcohol and cigarette
products, regardless of their retail price. Let us assume, for example, that the unitary
rate is P10 and the cheapest cigarette or alcohol brand costs P1 while the premium
brand costs P10. Since the rate is unitary, both classes will be subjected to the P10
unitary rate. The unitary rate means that the poor man (who will cater to the cheaper
brand) will have to pay P11, 91 percent of which is excise tax, while the rich man (who
will cater to the expensive brand) will pay P20, only 50 percent of which is excise tax.

Consumers will look for cheaper alternatives.

If consumers find the increase in price of too high due to the high tax rate, they might
lessen their cigarette consumption - at least in the short run. Consumers will continue to
feed their addiction by looking for substitutes.They will look for cigarettes that have a
lower price. Therefore, on the part of the smugglers, this could be an opportunity to
smuggle in more as consumers will buy lower-priced cigarettes as substitute for higherpriced cigarettes.

High income earners will continue their patronization compare to low income
earner.
Increasing Sin Taxes will greatly affect the low income earners compared to the high
income earner which will respond to the increase indifferently. By 2017, it will be a great
advantage for high income consumers because of unitary tax rate that will be
implemented.

FINANCING

Opportunity for smugglers.

The risk of smuggling cigarette and alcohol will be increased because some of us still
want to consume these commodities at lower cost. When the price of any product rises
excessively, smugglers bring in cheaper products. So instead of discouraging
consumption, the very high prices actually encourage it because the smuggled products
are very cheap.

Tobacco farmers may shift to the production of other agricultural products or

commercial crops.
Imposing Sin Tax greatly affect the tobacco industry which will lead to the unemployment
of the tobacco farmers. So the farmers may shift to other agricultural products and
commercial product that may help them in case they may lose their job.

Increasing tax means that people will have future jobs.

Having the Sin Tax bill becoming a law, not to mention the Reproductive Health Bill
also signed, our government had shown to the world that it has a strong political will to
institute reforms and thus, increasing the credit standing of our government. It had
shown other countries that our government has a strong will to improve the well-being of
its people and showed positive image to our country. Having this a law had increased
the income generating power of our government and it had also accelerated to reduce
our debt burden. Having a higher credit rating means that we would also increase our

investment grade and attracting more and more major investors from other countries,
therefore there will be lot of jobs available for the Filipino people in the future.

School of Business Management and Accountancy

Divine Word College of Legazpi
Legazpi City

Financial Impact of Sin tax Reform Law

And Its Expansion to the Stakeholders

Submitted By:
Donabel C. Alfornon
Oniza G. Bayle
Jhona Conda
Rachel Ann Giray
Lisette Lopez
Carolyn Kei B. Neo
Rizalyn F. Quindo
Group 4

Submitted To:
Tressa Adelfa M. Mortola, CPA
Professor