Cigarettes are among the world’s most highly taxed products.
The taxes on cigarettes and other tobacco products greatly affect the industry how it is organized and the product range. They raise huge amounts of revenue for governments. And they are controversial politically.
Furthermore, dialogue and co-operation between government and the tobacco industry is essential because of their importance to each other, particularly with regards the smooth operation of tobacco tax collection and the prevention of illicit trade.
The tax take
Taxation of tobacco products normally means taxes on cigarettes. This is because more than 90% of all tobacco worldwide is consumed as cigarettes. The rest comprises cigars, pipe tobacco, ‘roll-your-own’ tobacco and snuff.
The tax component of the retail price of a packet of cigarettes is usually somewhere between 30 and 80%.
Excise taxes on tobacco products provide governments with secure, easy-to-collect revenue. Around 2 to 3% of all government revenue in most developed economies comes from cigarette and tobacco taxes. The figure is even more in less developed economies where governments are less able to raise revenue from other sources such as personal income tax.
Methods of tax on cigarettes
Taxes on cigarettes are a form of indirect tax on consumers. Manufacturers and retailers collect the tax but ultimately it is consumers who pay it. The more they consume, the more tax they pay, so cigarette taxes are part of the group of taxes known as consumption taxes.
The application of taxation to tobacco products is relatively uncomplicated because in most countries there are only a few manufacturers and importers, the range of brands and pack sizes is limited, and retail prices are recommended by the manufacturers or importers, or regulated by the government.
The taxes fall into three broad categories:
• excise duties
• value added tax and sales tax (internal tax)
• import duties (external tax).
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