2.9 GOVERNMENT REVENUE FROM THE TOBACCO SECTOR

2.9.1 Source of government revenue

Tobacco is an important source of government revenues as tobacco products are considered luxury goods and have a heavy tax burden.

The proportion of fiscal revenues in total sales (see Table 2.15) was between 72 and 75 percent from 1990 to 1998. Taxes rose in the late 1980s (increased ICMS - a value-added tax for the states, and increased IPI - a federal tax on manufactured products). The taxes fell to 65 percent after legislation changed in 1999, and returned to levels similar to those of the mid-1980s. The total tax burden of direct taxes (without income taxes paid by industry) is currently 65.5 percent. Besides these taxes, there are other forms of taxation at state, municipal and local levels, and income tax and social security payments. Total taxes are estimated to reach around 70 percent of the final value of a cigarette packet. Since production and wholesale distribution are concentrated in a few large companies, these taxes are extremely difficult to evade. The revenues are very important sources of income for both state and federal governments.

Table 2.15: Fiscal revenues from sales of cigarettes in the domestic market

Note: (1) Includes all taxes. (2) Includes producer and retail revenues.
Source: Afubra and Abifumo.

Taxes and pricing of Brazilian cigarettes

Tax is a high proportion of the price of Brazilian cigarettes relative to other countries, around 74 percent (US$0.79), according to manufacturers’ estimates. In comparison, within MERCOSUR, equivalent taxes are 68.3 percent in Argentina, 66.5 percent in Uruguay and 13.5 percent in Paraguay. On average, for the period 1998-2000, Brazil’s total revenue from cigarette taxes was 5.4 percent of total federal tax revenue and 3.6 percent of total national tax revenue.

There are several different types of cigarette tax, including ICMS, a value-added tax. In the late 1990s two states (Minas Gerais and Rio de Janeiro) increased ICMS from 25 percent to 30 percent, making the total tax in those states about 78.5 percent of the average retail price.

Table 2.16: Cigarette industry turnover

Source: Sindifumo and Abifumo.

The industry has complained most about IPI, a tax on industrialized products, which doubled - from 15 to 30 percent - early in the 1990s, and changed again in 1999. Raising taxes - besides the fiscal reasons - has been an efficient instrument to discourage production, but does little to discourage consumption, due to the availability of imported cigars and cigarettes. Industry blames the tax increases for the contraction of the tobacco sector in Bahia, where a state that produced 240 million cigars a year in the 1940s, now produces 30 million at most. The cash-flow situation of the tobacco industry has subsequently been eased by altering the arrangements for IPI tax payment. This tax is now collected after cigarettes are sold at the retailer, whereas previously it was collected when cigarettes left the factory.

Government tax policy for tobacco

Export taxation has always been one option for government to raise fiscal revenues. However, it has a strong impact. After imposing a 150 percent export tax on tobacco in early 1999, cigarette exports dropped 90 percent, reaching the lowest export value for 20 years. Consequently, export earnings were only US$49.4 million, against US$607.6 million in 1998.

The domestic taxation of cigarettes is a major source of fiscal revenues. There are approximately 52 forms of taxation, rights, retentions and other burdens imposed by government. This tax burden encourages illegal and counterfeit products and smuggling, and curbs the competitiveness of legal products. Cigarette production - for both export and domestic markets - has dropped significantly, which Abifumo blames on new tax legislation.

Policy makers have considered increasing taxation of cigarettes in order to raise revenues, but experience shows that this would stimulate smuggling. In recent years, following the increase of taxes to 75 percent of total sales revenue, the illegal cigarette market in Brazil has grown substantially. Estimates by Abifumo for 2000 suggest that contraband could account for 30 to 34 percent of consumption - approximately 49 billion units (in 2000). In the case of cigars and cigarillos, taxation is 67 percent, and smuggling of those two products is also high, approaching an estimated 40 percent of the domestic market.

At least 366 brands are available on the illegal market, compared with 54 government-approved brands. Smuggling includes some counterfeit leading national brands, produced abroad but with tobacco of poor quality. Consumers know that the quality is poorer, but they buy them anyway because of the price difference. The illegal brands are easily marketed and sales are increasing. Meanwhile, legal brands are subject to extremely rigorous, bureaucratic and costly monitoring.

Industry figures show that the Brazilian market for legal cigarettes is some 97 billion units per year, generating receipts of $R 6.25 billion, while the illegal market is estimated to generate $R 1.85 billion. The volume sold illegally may reach 49 billion units, or around $R 1.3 billion in tax evasion (in 2000). This level of smuggling has affected producers, who now have considerable idle capacity, with consequent loss of jobs.