Taxes and tobacco consumption: GCC policy harmonization vital

Updated 23 October 2015
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Taxes and tobacco consumption: GCC policy harmonization vital

Government spending in the Gulf Cooperation Council (GCC) countries has been rising rapidly since the onset of the Arab Spring.
On the revenue side, oil and gas revenues account for more than 85 percent of GCC government revenue.
This high dependence on oil and gas makes the GCC countries highly vulnerable to oil price fluctuations, with the recent decline in oil prices bringing fiscal sustainability concerns to the forefront.
The IMF estimates that the GCC fiscal balance is expected to turn into deficit of $113 billion (8 percent of GDP) in 2015 from a surplus of $76 billion (4.5 percent of GDP) a year ago.
To address their revenue vulnerability and fiscal sustainability the GCC countries should prioritize fiscal reform and put in place policies to diversify the sources of government revenue. 
Revenue diversification policies should be directed not only at mobilizing non-oil revenue in the short run, but also at improving the buoyancy of tax revenue.
Government revenue diversification reforms are recommended with the most efficient plan being to introduce both broad-based sources of taxation (a value added tax) and indirect taxes (excise taxes) on specific goods and products like gasoline, diesel, alcohol and tobacco.
“The Global Tobacco Epidemic 2015” report, states that 6 million people a year die from tobacco-related diseases, with that number estimated to increase to 8 million people by 2030. According to the World Health Organization (WHO) and Tobacco Free Initiative (TFI), a 10 price increase on a pack of cigarettes would be expected to reduce demand for cigarettes by about 4 percent in high-income countries and by about 5 percent in low- and middle-income countries, where lower incomes tend to make people more sensitive to price changes. This price increase is interlinked with price and tax measures, as Article 6 of the WHO Framework Convention on Tobacco Control states: ‘Price and tax measures are an effective and important means of reducing tobacco consumption by various segments of the population, in particular young persons.’
However, despite clear evidence that increasing taxes is an effective intervention to reducing tobacco use whilst increasing government revenues, GCC countries remain constrained by international and bilateral trade agreements from raising the common external tariff on cigarettes and other tobacco products thereby restricting the ability of the GCC to raise prices to reduce tobacco consumption.
Tobacco consumption in Middle East

The Middle East and North Africa region is one of the fastest growing consumers of tobacco products, especially cigarettes.
With a young, fast-growing population, where smoking is culturally acceptable and with low awareness of health implications, tobacco consumption is high.
In 2010, the region accounted for a 7.1 percent market share of global cigarettes volume, the fourth largest globally. Significantly, the smoking of pipe tobacco in the region, popular due to the consumption of shisha, represents roughly 45.5 percent of global demand.
By country, Saudi Arabia has the highest per capita consumption of shisha pipe tobacco in the world while Egypt, which is MENA’s largest cigarettes market, consumes most in volume terms.
Saudi Arabia, with the largest GCC population, is the largest market for the cigarette industry, closely followed by the UAE.

Constraints on GCC tobacco tax policy options

The GCC countries are considering raising custom duty on tobacco, both to raise revenues and for health objectives of reducing consumption and smoking incidence (as per WHO guidelines).
The GCC recently endorsed a call by the WHO to raise taxes on tobacco.
However, they face a number of constraints in achieving their objectives given their international obligations.
International and bilateral trade agreements constrain the GCC countries from raising the common external tariff on cigarettes and other tobacco products thereby restricting the ability of the GCC to raise prices to reduce tobacco consumption and smoking incidence, while increasing government revenue from tobacco taxation.
The GCC nations are members of the WTO and have to comply with their treaty commitments and with a maximum import duty, known as the ‘bound’ rate.
The current 100 percent import duty across the GCC is set at the bound rate for both Bahrain and Kuwait.
Furthermore, free trade agreements signed by Bahrain and Oman separately with the US dictate that the countries remove tariffs on cigarettes (among other products) within a ten-year timeframe (due 2016 and 2019 respectively).
Last, but not the least, the GCC Customs Union agreement includes a Common External Customs Tariff (CET) for goods imported from outside the GCC, as well as common customs regulations and procedures, which further constrains tobacco tax policy options.

Tobacco taxation in GCC

The uniform system of cigarette taxation places the Common External Tariff at 100 percent of the CIF price (ad valorem) and a minimum specific duty equivalent to SR100 per 1,000 cigarettes, whichever is higher.
The minimum specific duty component of taxation is an essential component, given that it enables a secure contribution toward the government revenue base.
The minimum specific duty was first introduced by Saudi Arabia in the 1990s and was fully harmonized among GCC member states when Kuwait adopted the current KD8 per 1000 cigarettes minimum in 2002.
In the years that followed, manufacturers have increased prices of many brands above the levels at which the minimum duty applies, thus increasingly subjecting them to the ad valorem component of the tariff.
However, the minimum specific duty was not systematically adjusted for inflation and its real value and incidence has declined.
Any increase in specific duty would mean that all cigarettes must pay the minimum amount of tax regardless of their CIF price.
By contrast, when the ad valorem duty rises, the price of mid and premium price cigarette brands increase by more than that of low and cheap brands given that the tax charged is a proportion of the CIF price.
This provides an incentive to consumers to substitute, trading down to cheaper and lower quality products, which could reduce government revenues under a purely ad valorem tax regime and undermine governments’ health objectives.

Proposal for a new GCC excise duty regime for tobacco

The GCC countries should agree and introduce excise taxes on tobacco consumption as a policy tool to increase tobacco prices for health reasons and to raise revenue.
Ideally, the introduction of domestic excise taxes on tobacco should be in the form of a specific nominal excise duty to be introduced in each GCC member state consisting of a fixed amount per 1,000 cigarettes or equivalent units of other tobacco products.
The new excise duty would be introduced by the Ministries of Finance, with a revised mandate enabled by the requisite legal and regulatory reforms, which would set up the revenue administration.
It is also feasible that the revenue administration be out-sourced to customs, which then becomes Customs and Excise.
Additionally, there should be GCC policy harmonization ie. introduction of tobacco excise taxes should be applied uniformly (including on domestic production), equally and in synchronized manner in all countries in order to prevent arbitrage opportunities and illicit trade or smuggling.
The process of implementation of the new tax structure should also be gradual to avoid encouraging smuggling and illicit trade.
This will enable the building of tax capacity in the form of tax revenue authorities to implement the fiscal reform, monitor and collect revenue.
The set-up of an excise revenue administration has the added advantage of facilitating the introduction of other excises, notably on gasoline, diesel and other oil products — gradually leading to revenue diversification and eventually fiscal consolidation.

— Dr. Nasser H. Saidi heads Nasser Saidi & Associates, a niche consultant and adviser to governments, central banks, regulators, multi-national and regional companies. He is the former chief economist of the Dubai International Financial Center from 2006 to 2012.


Crisis at India's Jet worsens as it grounds planes, faces strike

The debt-laden carrier has delayed payments to banks, suppliers, pilots and lessors. (Reuters)
Updated 25 min 19 sec ago
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Crisis at India's Jet worsens as it grounds planes, faces strike

  • More than 20,000 people are employed in the company
  • The company had to stop more than 50% of their aircraft due to insufficient funds

MUMBAI: India's Jet Airways was fighting multiple crises Wednesday after grounding six planes, leaving it with only a third of its fleet flying, while pilots have threatened to walk out and a major shareholder is reportedly looking to offload its huge stake.

The problems at India's number-two carrier come as other airlines struggle to turn a profit despite the sector rapidly expanding in the country over recent years.

Jet, which employs more than 20,000 people, is gasping under debts of more than $1 billion and has now been forced to ground a total of 78 of its 119 aircraft after failing to pay lenders and aircraft lessors.

In a statement late Tuesday announcing its latest grounding, the firm it said it was "actively engaging" with lenders to secure fresh liquidity and wanted to "minimise disruption".

But with hundreds of customers left stranded, Jet's social media accounts have been flooded with often suddenly stranded passengers demanding information, new flight tickets and refunds.

"@jetairways We book our flights in advance so that we save on travel cost and you are sending cancellation (message) now?", read one irate tweet on Wednesday.

"I have sent a DM (direct message) regarding my ticket details. Please respond!", said Sachin Deshpande, according to his Twitter profile a design engineer.

Another, Ankit Maloo, wrote: "Received an email for all together cancellation of flight days before departure without any prior intimation or communication over phone!"

The firm is also facing pressure from its many pilots who have not been paid on time, with unions threatening they will walk off the job if salaries do not arrive soon.

"Pilots will stop flying jet planes from 1st April 2019 if the company does not disburse due salaries and take concrete decisions," a spokesperson for the National Aviator's Guild, a pilots union, told AFP.

India's aviation regulator on Tuesday warned Jet Airways to ensure that staffers facing stress are not forced to operate flights.

Meanwhile, Bloomberg reported that Etihad Airways of the United Arab Emirates has offered to sell its 24 percent stake in Jet to State Bank of India (SBI).

A collapse would deal a blow to Prime Minister Narendra Modi's pragmatic pro-business reputation ahead of elections starting on April 11.

India's passenger numbers have rocketed six-fold over the past decade with its middle-class taking advantage of better connectivity and cheaper flights.

The country's aviation sector is projected to become the world's third-largest by 2025.

But like other carries, Mumbai-based Jet has been badly hit by fluctuating global crude prices, a weak rupee and fierce competition from budget rivals.

Alarm bells for Jet first rang in August when it failed to report its quarterly earnings or pay its staff, including pilots, on time. It then later reported a loss of $85 million.

In February, it secured a $1.19 billion bailout from lenders including SBI to bridge a funding gap, but the crisis has since deepened.

"Jet Airways is rapidly reaching a point of no return and running out of assets to keep itself afloat," Devesh Agarwal, editor of the Bangalore Aviation website, told AFP.

"The only solution is equity expansion by diluting its stakes but Jet is just trying to cut losses and running out of options," Agarwal said.

Shares in Jet Airways were down more than five percent on Wednesday.