The dilemma facing GCC finance ministers as they deliberate over a 100 percent increase in duty on tobacco products is underlined by a White Paper published yesterday which spotlights growth in illicit trade, beyond the control of police and customs authorities, as an inevitable consequence of a sharp overnight rise in the cost of cigarettes.
Based on a round table discussion examining the impact of a new tobacco tax on smoking, and the effects on trade and social stability, the White Paper finds no evidence that a one-step, 100 percent overnight increase in duty on tobacco products will significantly affect consumption levels or smoking propensity.
It highlights concern that a sharp increase in cigarette prices will fuel the growth of illicit tobacco trade into the GCC countries, undermining tobacco control and leading to young people being targeted by gangs involved in smuggling.
Measuring the cost to the economy and society in general from increased trade in counterfeit goods, with the media reporting illegal markets springing up in the region, the White Paper spotlights a need for strong measures to effectively protect legitimate and local businesses.
It also points to a need for the GCC authorities to take a lead role in driving education and awareness programmes to warn people — especially the young – against the risks of smoking, removing the "cool factor" from smoking, and reinforcing tobacco control by putting in place more barriers to smoking in public places to affect the habits of smokers.
The round table discussion, which took place in Dubai on April 14, brought together Major Dr. Khalid Al-Hassan, head of the Anti-Forgery section of the Economic Crime Department, Dubai Police, Jonathan Davidson, chairman of the British Business Group — Dubai and the Northern Emirates, and managing partner of Davidson & Co Legal Consultants, Omar Obeidat, partner and head of intellectual property at Dubai law firm, Al-Tamimi & Co., and Dr. Bruce Budd, associate professor, College of Business, Al-Faisal University, Riyadh.
Journalist and broadcaster Richard Dean, who moderated the discussion, said one of the key questions related to tobacco tax is whether an increase in price has an impact on smoking levels.
He cited recent reports from the World Health Organisation (WHO) which claim that, in general terms, a ten percent price increase in a high income country will see a four percent reduction in smoking levels. In poorer, economically deprived countries, the same increase would bring a reduction of between four and eight percent.
Major Dr. Al-Hassan believes the impact in the GCC would be far lower than four per cent. He said the UAE is “a country where the majority of the population has a high income, so they don’t care about a price increase. The price of cigarettes is not expensive when compared to other areas of the world. A price increase may affect some nationalities with a low income, but for UAE locals and expatriates, they don’t care. I don’t think tax would be the solution to problem.”
Some experts, however, question whether a sharp rise in cigarette prices will have any effect on smoking, citing Japan, Ireland, Sweden, Singapore, Malaysia and Canada as recent examples of countries where higher tax did not have the desired effect.
In Ireland, increases in excise duty on cigarettes between 2001–2003 and 2006–2009 did not result in a decline of total consumption and smoking incidence and were also counter-productive from a Government revenue perspective. In the 2010 budget the Irish minister of finance decided against any further rises in excise duty on tobacco because the high price was giving rise to massive cigarette smuggling.
Obeidat said: “You have to consider that a price increase will invite people to trade in counterfeiting. If you add on top of that the issue of smuggling, which is a by-product sometimes of tax increases, you’re going to have a double impact of counterfeiting increases plus smuggling increases. Smuggling affects the legitimate trade and hits the revenue of the government.”
Illicit trade creates uncontrolled and unaccountable markets, resulting in children being able to obtain tobacco more easily, and the livelihoods of tobacco retailers being threatened.
It is estimated that approximately 600 billion illegal cigarettes are sold each year worldwide, representing 11 per cent of the global market. Illicit trade also means governments and legitimate businesses lose billions of dollars in revenue each year, while the cost of fighting crime is becoming increasingly expensive.
Davidson suggested that efforts to counter illicit trade in tobacco products could be helped by the kind of publicity which had deterred people in the UAE from, for example, risking issuing checks that bounce because of the legal consequences.
He said: “It would be interesting if you could create the same knowledge and deterrent for tobacco so that no-one would ever contemplate touching a counterfeit product.”
Obeidat added: “The prime issue is punishment once detected, because you want people to hear horror stories about the penalties, or the consequences of breaching the law. But in order to have a sensible approach to deterrence, you need a proper monitoring and detection system.”
Major Al-Hassan suggested a better alternative to a one-step 100 percent increase in tobacco duty was a phased-in increase over five years, as with the 1995 GCC tobacco tax. He said: “I disagree with the sudden rises in taxes. Even when alcohol was banned, it was done in three stages.”
A phased-in approach would give customs authorities more time to put in place newer track and trace technology, resulting in corrective action to disrupt the flow of smuggled cigarettes, and the provision of valuable data and insights into overall smuggling activities and trends.
Budd said if duty on tobacco products was increased by another 100 percent, the action would need to be supported by education, supervision and deterrent, “otherwise it becomes farcical, because there will be alternative markets emerging.” He said illicit trade was “almost a tourist attraction”, in the UAE, highlighting Dubai’s Karama shopping area, and raising a serious question mark over the region’s ability to cope with any increase in illicit trade which could result from a sharp rise in duty on tobacco products. “I just wonder, have we got the infrastructure to actually do it,” he said.
Al-Hassan commented: “If you raise tax, illicit trade will begin and governments must then spend big sums of money to combat that illicit trade.” He said the UAE “would require more resources to handle the knock on effects at border controls.” And he added: “We would have to close our borders and tell tourists not to come, until we find a solution”.
Budd reiterated the need to remove the "cool factor" which may still be attached to smoking, particularly among the younger generation. By changing the habits of smokers and implementing greater barriers in public places, the attitudes towards smoking will begin to change.
Summarizing the “risk-reward” nature of a major rise in tobacco duty against the alternative option of a phased-in approach, Davidson said: “The overriding objective of any government or regulatory authority has to be to improve the health of its population, and by necessity, it also has to be to maintain and improve government revenue streams.
“Attached to any reward there are going to be risks, and the risk in this instance is the risk of increased counterfeit trade derived from organised crime, which would result in a requirement for increased resources of enforcement and better regulation and stiffer penalties.”