China's tobacco industry will pay 5 billion yuan (US$602 million) more in taxes this year under a new tax rule that eliminates the loophole that allowed the industry to legally dodge paying 10 billion yuan in taxes annually.
"We had to adopt a more practical tax system to avoid a significant loss of national income taxes," said an official at the State Ministry of Finance, who declined to be identified. "And we anticipate some industry restructuring, particularly among unprofitable small-to-medium sized companies."
The current tobacco tax of 25 percent to 50 percent was levied only on wholesale prices. Companies could dodge the tax by setting wholesale prices low and then selling their products at much higher prices to retail subsidiaries, the State Ministry of Finance official said.
Starting July 1, tobacco manufacturers will pay 30 percent tax on retail cartons of cigarettes sold below 50 yuan each and a 45 percent tax on those sold for more than 50 yuan. In addition, a 150 yuan tax for every cargo of cigarettes (a cargo contains 50,000 cigarettes) will be charged.
Industry officials said that the new tax policy will affect high-end and low-end products. Middle market products, priced at around 50 yuan a carton, will benefit from the new tax rules.
The effects of the tax hike will be felt immediately by the country's more than 100 cigarette companies.
Shanghai Tobacco (Group) Corp., China's second largest tobacco group generating 9.2 billion yuan tax last year, said the new policy will cost its group 1 billion yuan in profit each year because the group focused its business on the upscale market which falls under the new tax rule.
"We can't understand why the government adopted this new policy as it'll affect our long-term development and limit the production of high-end cigarettes," said Li Yue, finance director at Shanghai Tobacco. "We'll have to develop more middle market products to avoid further profit loss."
Chen Tuliu, finance director at Yunnan Province's Hongta Group, the country's largest cigarette producer generating 10 billion in taxes last year, said the new tax policy won't have much effect on the company.
"But sales of our high-end Hongtashan brand were affected by the regional industry protection and chaotic competition in recent years," Chen said. "Whether the policy is effective in adjusting industry structure remains uncertain as companies can always find ways out of government policy res-trictions."
Manufacturers surveyed yesterday said that cigarettes' high profit margin allows them to absorb the extra costs rather than raising prices.
