Research Findings of China’s Tobacco Tax

Ji LiangResearch Center for Fiscal Science, Ministry of Finance

Lijiang, ChinaOct.19, 2011

Main Contents

• Current Status of China’s Tobacco Tax• Tobacco Consumption Tax and Tobacco Control in China• Thoughts about How to Realize Tobacco Control by Tax

Current Status of China’s Tobacco Tax

• Basic Tax Structure (Production Stage)Related Tax Categories

Illustration

Increment Value Duty Levy Stage: Production Stage

Tax Base: Increment Value

Tax Formula: Sales Revenue ×17 ％－ all items of purchasing cost× adapt to tax rate

Revenue Sharing: Central Government 75 ％ , Local Government 25 ％

Consumption Tax Levy Stage: Production Stage

Tax Base: Sales Revenue, Sales Quantity

Tax Formula: Consumption Tax ＝ Sales Revenue ×Tax Rate （ 56 ％或 36 ％）＋ Sales Quantity ×0.003 Yuan/cigarette

Revenue Sharing: Central Government

Urban Construction Tax And Educational Surtax

Levy Stage: Production Stage

Tax Base: Increment Value Duty, Consumption Tax

Tax Formula: Urban Construction Tax ＝ ( Increment Value Duty + Consumption Tax )×7 ％

Educational Surtax ＝ ( Increment Value Duty + Consumption Tax )×3％

Revenue Sharing: Local Government

Business Income Tax Levy Stage: Gained Income

Tax Base: Income － all items of income

Tax Formula: Business Income Tax ＝ ( Profit ＋ All kinds of adjustment ） ×25 ％

Revenue Sharing: Central Government 60 ％ , Local Government 40 ％

Other Items of Taxation

Vehicle and Vessel Tax, Real Estate Tax, etc

Current Status of China’s Tobacco Tax

• Basic Tax Structure (Wholesale Stage)

Related Tax Categories

Illustration

Increment Value Duty Levy Stage: Production Stage

Tax Base: Increment Value

Tax Formula: Sales Revenue ×17 ％－ all items of purchasing cost× adapt to tax rate

Revenue Sharing: Central Government 75 ％ , Local Government 25 ％

Consumption Tax Levy Stage: Production Stage

Tax Base: Sales Revenue

Tax Formula: Consumption Tax ＝ Sales Revenue ×Tax Rate（ 5%）

Revenue Sharing: Central Government

Urban Construction Tax And Educational Surtax

Levy Stage: Production Stage

Tax Base: Increment Value Duty, Consumption Tax

Tax Formula: Urban Construction Tax ＝ ( Increment Value Duty + Consumption Tax )×7 ％

Educational Surtax ＝ ( Increment Value Duty + Consumption Tax )×3％

Revenue Sharing: Local Government

Business Income Tax Levy Stage: Gained Income

Tax Base: Income － all items of income

Tax Formula: Business Income Tax ＝ ( Profit ＋ All kinds of adjustment ） ×25 ％

Revenue Sharing: Central Government 60 ％ , Local Government 40 ％

Other Items of Taxation

Vehicle and Vessel Tax, Real Estate Tax, etc

Current Status of China’s Tobacco Tax

• Basic Tax Structure (Retail Stage)

Related Tax Categories

Illustration

增值税 Levy Stage: Production Stage

Tax Base: Increment Value

Tax Formula: Sales Revenue ×17 ％－ all items of purchasing cost× adapt to tax rate

Revenue Sharing: Central Government 75 ％ , Local Government 25 ％

城建税和教育费附加 Levy Stage: Production Stage

Tax Base: Increment Value Duty, Consumption Tax

Tax Formula: ： Urban Construction Tax ＝ ( Increment Value Duty + Consumption Tax )×7 ％

Educational Surtax ＝ ( Increment Value Duty + Consumption Tax )×3％

Revenue Sharing: Local Government

企业所得税 Levy Stage: Gained Income

Tax Base: Income － all items of income

Tax Formula: Business Income Tax ＝ ( Profit ＋ All kinds of adjustment ） ×25 ％

Revenue Sharing: Central Government 60 ％ , Local Government 40 ％

其他税种 Vehicle and Vessel Tax, Real Estate Tax, etc

Current Status of China’s Tobacco Tax

• Tobacco tax revenue plays a critical role in financial income of China, which account for 6% of financial income in recent years.

2008-2010 Tobacco Tax Revenue (unit: 0.1 billion Yuan, %)

Year Tobacco Profit Tax Paid Financial Amount

Paid Financial Proportion

Financial Income Proportion (％ )

2008 44993299 73.33 61330 5.38

2009 51314163 81.13 68518 6.08

2010 60454998 82.68 83080 6.02

Current Status of China’s Tobacco Tax

• Turnover tax of tobacco industry, tobacco consumption tax in particular, plays a critical role in turnover tax revenue in China.

2000-2007 Tobacco Turnover Tax Revenue (unit: 0.1 billion Yuan, %)

YearIncrement Value

DutyConsumption

Tax Tobacco Tax Total

Tobacco Consumption tax’s Proportion among Consumption Tax

Turnover Tax of Tobacco Industry ‘s Proportion

among Domestic Turnover Tax Revenue

2000 137.58 524.3 　 661.88 60.68 11.96

2001 161.84 551.48 25.01 738.33 59.24 11.52

2002 210.97 651.37 28.69 891.02 62.21 12.12

2003 245.11 725.18 30.95 1001.23 61.3 11.7

2004 311.47 919.76 39.68 1270.91 61.19 8.78

2005 322.59 1003.12 49.44 1375.15 61.38 8

2006 359.05 1134.22 41.32 1534.59 60.15 7.5

2007 418.8 1333.53 47.5 1799.83 60.43 7.4

Current Status of China’s Tobacco Tax

• Tobacco tax is an important source for taxation in China. Among top 500 tax paying enterprises, tobacco companies are critical component. In 2007, 100 tobacco companies are on the list of top 500, which accounts for 20%. The total paid tax amount was 209.963 billion Yuan, accounting for 14.6% of the total. HUNAN ZHONG YAN is the 3rd one on top 500 list.

Tobacco Consumption Tax and Tobacco Control in China

• Tobacco Consumption Tax Structure and Tobacco Control Before the year 1994, tobacco industry was levied of 60% product

tax like other industries;– Since Jan.1st, 1994, consumption tax of tobacco products were

levied by following the rate. The tax rate of category A cigarettes, category B cigarettes and Cigars, and imported cigarettes were 45%, 40% and 45%, respectively. ( To balance tax bearing)

– Since July 1st, 1998, to further improve structure of cigarette products, consumption tax structure reform of cigarette products was introduced and tax rate structure of cigarette consumption tax was adjusted. Consumption tax rate of cigarette was adjusted into 3 ranks: rank 1 of 50%, rank 2 and 3 of 40%, and rank 4 and 5 of 25%. ( To adjust product structure)

Tobacco Consumption Tax and Tobacco Control in China

• Tobacco consumption tax structure reform and tobacco control: key point is not tobacco control – Since June 1st ,2001, tax calculation method and rate of cigarettes cons

umption tax was adjusted. A combined tax calculation method of following both quantity and price was introduced, that is, quota tax of 150 Yuan every 50,000 cigarettes, and following price calculation was adjusted into 2 ranks from former 3 ranks. Every strip of cigarette of 50 Yuan and above was levied of 45% tax rate, and every strip of cigarette below Yuan was levied of 30% tax rate. (Supporting famous brand cigarettes and small brand of cigarettes )

– In 2009, a ad valorem tax was added at wholesale stage of all kinds of cigarettes and the consumption tax rate was 5%. The consumption tax rate at production stage was adjusted. The tax rate of category A cigarette (200 cigarettes/strip, of 70 Yuan and above excluding increment value duty) was adjusted to 56%; tax rate of category B cigarette (200 cigarettes/strip, of 70 Yuan and below excluding increment value duty) was adjusted to 36%; and consumption tax of cigars at production stage was adjusted up to 36% from 30%. The following quantity quota tax rate of cigarette remained unchanged, that is 150 Yuan per base box. (Increase financial income appropriately, and improve tobacco product’s consumption tax)

Tobacco Consumption Tax and Tobacco Control in China

• Tobacco Consumption Tax Revenue for Tobacco Control

2003-2009 Tobacco Consumption Tax and Cigarettes Sales Quantity

Year Consumption Tax (0.1 billio

n Yuan) Increasing rate (%)Cigarettes Sales Quantity

(0.1 billion ) Increasing rate (%)

2003 725.18 17969.95 　

2004 919.77 26.83 18778.6 4.50

2005 1003.12 9.06 19584.6 4.29

2006 1134.22 13.07 20352.2 3.92

2007 1333.53 17.57 21395.9 5.13

2008 1816.16 36.19 22044.4 3.03

2009 2410.16 32.71 22500 2.07

Tobacco Consumption Tax and Tobacco Control in China

0. 00

5. 00

10. 00

15. 00

20. 00

25. 00

30. 00

35. 00

40. 00

2004年 2005年 2006年 2007年 2008年 2009年

卷烟消费税增速 卷烟销售量增速增速

• Tobacco Consumption Tax Revenue for Tobacco Control: achieved certain effects but not obvious

2003-2009 Increasing Curve of Tobacco Consumption Tax and Cigarettes Sales Quantity

Tobacco Consumption Tax and Tobacco Control in China

• Cause Analysis – Tax is only one of the tool for tobacco control, which requires as

sorted measures;– Tobacco monopoly system and cigarette price control greatly de

crease the effect of tax on tobacco control;– Consumption tax system doesn’t place tobacco control on its top

agenda

Thoughts about How to Realize Tobacco Control by Tax

• Corresponding change of price and tax, clear tax shifting channel;• Tobacco consumption tax system should put tobacco control on its t

op agenda;• Further improve overall tax bearing of tobacco consumption tax

– Cigarette consumption population mainly concentrate in rural areas. Those smokers are sensitive to price due to relatively low disposable income. Therefore, increase tax bearing of lower rank cigarettes could reduce smokers in rural areas.

– The aim for tobacco control should focus on “newly increased” smokers, that is, gradually reduce new smokers, juveniles in particular. Low price cigarettes are mostly consumed by those “new smokers” who are sensitive to price.

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