Some doubt that China’s tax rise will reach smokers

China announced on Friday that it would raise the wholesale consumption tax on cigarettes from Sunday, according to a Xinhua News Agency story citing a statement jointly issued by the Ministry of Finance (MOF) and the State Administration of Taxation.

The tax rate imposed on cigarette wholesalers on the basis of taxable prices was due to be increased from five percent to 11 percent, and wholesalers would have to pay an additional Yuan0.005 (less than US 1¢) for each cigarette they sold, the statement said.

There was no explanation of why the tax increase was being imposed.

The MOF’s Research Institute for Fiscal Science said that if the higher tax were passed on to cigarette consumers, they would pay seven percent more for the average pack of cigarettes. According to a story in The Star, Kuala Lumpur, also announcing the tax rise, a tax increase in 2009 had not been passed on to consumers.

If the increase is passed on, it is expected to cut cigarette consumption by four to five percent and add Yuan100 billion to annual tax revenue, according to statistics from the research institute.

Last year, the industry paid Yuan911 billion in taxes, which amounted to 8.8 percent of total tax revenue. This year the industry is expected to hand over more than Yuan1 trillion.