Nov 27, 2014 01:44 PM

China Has Pledged to Curb Its Smoking Habit, but Results Are Meager

(Beijing) — It has been a tough war against tobacco in China, the world's largest cigarette market. Battles have occurred between supporters of tobacco control and cigarette companies over packaging, advertising, sponsorship and legislation.

In November 2003, China became a party to the World Health Organization's Framework Convention on Tobacco Control, an international treaty intended to reduce tobacco-related diseases and deaths. The country's top legislature formally ratified the convention in August 2005, but implementation has stalled.

Under the treaty, China should ban tobacco companies from advertising and public sponsorships, and smokers from lighting up in public areas. It is also required to post anti-tobacco notices on every single pack of cigarettes, but the country's strong tobacco industry has resisted the measures for years.

China's number of smokers and sales of cigarettes have continued rising. The WHO ranks China 130th out of the 167 countries that signed the convention in terms of implementation of the treaty.

Yang Gonghuan, the former deputy director of the Chinese Center for Disease Control and Prevention (CDC) and an advocate of tobacco control said that "China's legislation on tobacco control has lagged behind and measures have remained weak."

In 2012, Beijing issued a document setting targets for tobacco control for the following three years, including drafting a national law on tobacco control, reducing the youth smoking rate from 11.5 percent in 2010 to 8.5 percent by 2015, and cutting the adult smoking rate to less than 25 percent. "But almost no progress was made in the first two years," Yang said.

The use of taxation and prices to cut cigarette sales, steps that experts say are effective tools in tobacco control, have been suspended. Yang said the 2012 document did not say a word about raising tobacco taxes and prices, implying great resistance from the industry.

At the sixth meeting of convention members in Moscow on October 15, the WHO suggested that more than 70 percent of the cigarette sales price should be taxed. In China, the figure stands at between 40 percent and 46 percent.

128 Billion Packs a Year

Expectations that tobacco taxes will be raised have soared since the beginning of the year as the government started reforming its taxation system. Because regulators have vowed to push forward with reforms to consumption taxes, many are looking for a breakthrough in revising levies on the tobacco industry, one of the largest contributors to government revenues in the country.

Hu Dewei, a health economics professor at the University of California, Berkeley, said increasing tax rates and prices are the most effective measures in tobacco control and come with the lowest administrative costs.

Shi Jian, a policy researcher at the State Administration of Taxation, said the major levies imposed on the tobacco industry are consumption and value-added taxes. The former accounts for 60 percent of the total tax payment the tobacco industry is responsible for, and accounts for nearly half of the total consumption tax collection in the country.

During this year's meeting of the top legislature in March, the minister of finance, Lou Jiwei, said that the consumption tax can be levied on both the production and wholesale stages of the industry. His statement was interpreted as a signal that changes were on the way.

A report from the Ministry of Finance also indicated that last year the ministry told finance officials in the northern province of Hebei to study taxation of tobacco wholesales, which could be extended to the retail stage.

A tax administration official said the current economic situation provides a good opportunity for raising taxes, and the "efforts made by tobacco control supporters have greatly influenced policymakers."

Heavier taxes on tobacco are expected to translate into higher cigarette prices, curbing consumption. Hu estimated that raising the cost of each pack of cigarettes by 1 yuan would spur 4.1 million people to quit smoking and add 85.4 billion yuan to government coffers.

Some 128 billion packs of cigarettes are sold every year in the country, and the tax ratio per pack is low. In China, some 67 percent of the cost of a pack of cigarettes is tax, while the figure in developed countries is 200 percent.

Tax Debate

The tobacco industry has argued that its tax burden is already too high. Official figures show that in 2013, the total sales revenue of cigarettes was 1.37 trillion yuan, while the industry's total tax contribution was 800 billion yuan. People in the industry argue the overall tax burden on the industry has reached 59.5 percent, close to the 70 percent standard the WHO proposes.

But others come up with very different figures based on different methodology. Zheng Rong, a professor at the University of International Business and Economics in Beijing and the leader of a WHO project on tobacco tax levies, said China's tax collection from cigarette production and sales only accounted for a burden of 46 percent.

Hu also estimated that the actual tax burden for the tobacco industry is around 40 percent.

Zhao Jinping, deputy director of the Fiscal Science Research Center under the Ministry of Finance, said that "a median line for international tobacco tax is between 60 percent and 70 percent, but ours is about 45 percent to 50 percent."

Hu said differing figures are due to the tobacco industry including all kinds of taxes and charges in its calculations, but many of these payments are not included in the calculation of tax burden based on international accounting rules as they are not reflected in retail prices, which is essential to influence consumers.

The debate has gone on for years. Supporters of tobacco control say that raising the tax rate will generate more revenue for the government while curbing smoking. However, the cigarette industry regulator argues that a higher rate will hurt low-income smokers, leading to smuggling and job cuts in the industry.

China raised the levy on the industry in May 2009, including increasing the consumption tax imposed on manufacturers by 6 percent to 11 percent, while adding a new 5 percent levy on wholesalers. However, experts say the hike was designed to boost fiscal revenue after the 2008 financial crisis, not help tobacco control.

Jiang Yuan, deputy director of the CDC's tobacco control office, said right after the increase that the tobacco regulator announced the industry would take care of the cost increase and keep retail prices unchanged.

The country's tobacco retailers are licensed and strictly controlled by the Chinese National Tobacco Corp. (CNTC), a state-owned monopoly that manages the growing of tobacco plants, cigarette manufacturing and advertising. It is also in charge of enforcing policies for tobacco and cigarette production set for by its umbrella agency, the State Tobacco Monopoly Association. The blurry boundary between the regulator and the regulated has been widely criticized for blocking policies targeted at tobacco control.

Hu said taxation is only one method of tobacco control, and retail prices were where the real power is. Only when a tax increase is accompanied by higher retail prices will results be seen.

Experts have proposed various plans for adjusting tobacco taxes, mainly focusing on raising the consumption tax rate and gradually eliminating cheap cigarettes from the market.

Some tobacco control advocates say more attention should be paid to imbalanced tax collection on the industry chain. Production, manufacturing and sales are subject to different tax rates because they fall under the different categories of agriculture, industry and commerce. Production is hit with a higher tax, but its profit margin is much lower than that for the sales segment.

Meanwhile, many localities rely heavily on revenue from tobacco taxes as a substantial source of fiscal income, resulting in a complex relationship between governments and the tobacco industry and creating hurdles to tax reforms.

Many experts say imposing a consumption tax on retail sales will help cut local governments' reliance on production while more effectively addressing retail prices.

However, Zhang Bin, director of taxation research office under the Chinese Academy of Social Sciences, said there is little possibility that a consumption tax will be imposed on retailers due to the great difficulties in collecting from such a large number of sellers. A possible solution is to adjust the consumption tax wholesalers pay.

Interest Game

Joining tobacco companies in opposing price hikes are the country's large number of smokers. They consume an addictive product, and demand will be difficult to reduce. Meanwhile, the CNTC says more than 500,000 people are employed by the country's tobacco industry and more than 2 million households live on tobacco cultivation. They are, of course, highly concerned that changes to the tax structure will hurt their livelihoods.

The huge size of the industry and its significant contribution to government revenue mean it has great clout in dealing with policymakers. Official figures show that last year tobacco companies made a total of 816 billion yuan in tax payments, about 6.32 percent of the government's total fiscal revenue. This is the most of any industry in the country.

In the southwestern province of Yunnan, where tobacco cultivation is a major economic pillar, taxes paid by the tobacco industry account for as much as 70 percent of fiscal revenue.

"Executives of the CNTC are always treated as distinguished guests by local authorities," said Wu Yiqun, deputy director of ThinkTank Research Center for Health Development, a tobacco control group.

Experts have suggested policies to help local governments reduce their reliance on tobacco taxes and find new sources of revenue.

However, Gao Song, professor at Central University of Finance and Economics in Beijing, said this will not be easy because economic pain, such as job cuts, brought on by tobacco control will be more easily seen than an improvement in public health, which will take time.

The challenge for policymakers is balancing the costs of reforming the industry and public health. Zhang Xiulan, public policy professor at Peking University said "the government needs to show courage in dealing with the tobacco industry and fulfilling its promises under the WHO convention."

Hu said it is "very difficult" to see China increasing its tobacco tax as high as the WHO standard within the next few years.

(Rewritten by Han Wei)

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