What is a sin tax?
Sin tax is an excise tax imposed on goods such as cigarettes and liquor or activities like gambling that are considered harmful or immoral.
Excise taxes, as opposed to general taxes, are selective in coverage and discriminating in intent. They are applied only to certain products and activities.
Excise duties on tobacco and alcohol are potential revenue sources because of high sales volume and few producers, and these make collection simple.
History of sin tax in PH
Pre-1986 — A tiered specific tax system based on suggested retail price is put in place.
1986 — President Corazon Aquino’s administration reforms the tax system by changing the specific or unit-based tax to an ad valorem scheme, which is based on manufacturer’s price, for cigarettes.
An ad valorem tax (AVT) scheme allows for automatic increases in collections with increases in inflation. Despite this, excise tax collections are low because cigarette manufacturers kept factory prices low.
1987 — The 1987 Constitution, Section 28, Paragraph 1 provides that “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.”
1993 — Congress imposes a floor tax on each category of cigarettes, modifying the AVT system. Collections improve despite the bias against foreign brands.
1997 — Republic Act No. 8424 or the Comprehensive Tax Reform Program is passed with the compromise that the AVT will revert to specific, but cigarette taxes will not be based on inflation. Instead, the rates will be based on net retail price.
2004 — Congress passes Republic Act No. 9334, contributing to raising tax collections, but it is widely considered a watered-down law. It came into force in January 2005. The law mandates an increase in the excise tax rate on all brands of cigarettes and alcohol products every two years. It specifies varying rates of increases until 2011.
Alcohol products are taxed based on the raw materials used to make the product, the net retail price per bottle of the product, and proof (volume of alcohol in alcohol-water mixture) of the beverage.
Cigarettes are taxed based on the brand’s retail price. Effective January 2011, low-priced cigarettes are taxed P2.72 per pack; medium-priced, P7.56 per pack; high-priced, P12 per pack; and premium, P28.30 per pack.