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Impact of Cigarette Excise Rate Increases on Tobacco Consumption and Tax Revenue in Rwanda

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Naphtal Hakizimana, Rwanda Revenue Authority (RRA)

Published in: Economy & Finance
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Impact of Cigarette Excise Rate Increases on Tobacco Consumption and Tax Revenue in Rwanda

  1. 1. The Impact of cigarette excise rate increases on tobacco consumption and tax revenue in Rwanda(2008Q2-2016Q3). HAKIZIMANA Naphtal October 2017 1
  2. 2. Content 2 Background of the study1 Taxation regime2 Methodology used to measure the impact3 Findings4 Policy implications5 How excise tax affects cigarette consumption? b Tobacco taxation regime in Rwandaa
  3. 3. Justification for Excise Duty on Tobacco in Rwanda 3 5.2 5.3 7.6 5.1% 4.7% 5.6% 4.0% 4.5% 5.0% 5.5% 6.0% 0 2 4 6 8 2013/14 2014/15 2015/16 %ShareinTotalExcise collections TobaccoExciseTax(Billion FRW) Tobacco Excise tax collections Tobacco Excise Tax(BnFRW) Share in Total Excise  Is justified in terms of the negative health impacts of smoking.  In addition to discouraging smoking, Excise Duty on tobacco helps generate government tax revenue. Tobacco Excise Tax grew continuously Share in Total Excise Tax Fallen in 2014/15
  4. 4. Rwanda introduced new policy in order to maximize revenue collection and reduce cigarette consumption 4 Tobacco Taxation regime in Rwanda (For imports and local cigarettes) 60% in 2001 150% since 2009-June 2015 36% of the retail price + specific excise of FRW20/pack of 20 since July 2015 Purely ad-valorem Move to Mix of both ad-valorem and specific excise What was the effects of the new policy? In terms of revenue generation, the policy effect was a mere of FRW1.4Bn, which is far less than FRW5.0Bn that was anticipated The new policy raised the price and reduced the cigarettes consumption by -17.4% which was in line with the MINISANTE target By implementing this new policy, does the Ministry of Finance take into account the behavioral implications of increasing the cigarette price which in turn had an impact on expected tax revenue? Question 120% in 2007
  5. 5. What other people have said on the use of high taxes to reduce smoking? 5 From Public Health Perspective By Preventing non- smokers from starting Preventing former users from re-starting Leading current users to try to quit How this concept of taxation policy is understood? Is through the concept of price elasticity of demand for measuring the responsiveness of cigarette consumption to changes in the adjusted price of cigarette Some studies found that Barzel found that overall price elasticity of demand ranges from -0.5 to -0.25 in high income countries 10% in cigarette price will cigarette consumption by between 5 and 2.5% Others found that youth and young adults are more responsive than adults Suggested that high taxes leading to high price would be a very effective means to permanent reductions in smoking for all age groups
  6. 6. Methodology used to perform the analysis 6 Study used time series data(2008Q2- 2016Q3) To estimate cigarette demand function parameters and price elasticity of demand To calculate the tax elasticity of price (extent to which tax increases reflect in price increases) What are important variables? Cigarette tax:Ctax Cigarette Produced:Cp Cigarette Consumed:Cc Tobacco Exc.Rate:TER Per Capita Income:Y C. Selling Price:Pc Dummy :D 4 models were used Log Linear demand f(x) with real price and real income as Ind.Vari.: 𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + 𝜀𝑡1 Includes a dummy representing the period after new policy:𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + µ3 𝐷 + 𝜀𝑡 Time trend to represent all other factors that influence the demand: 𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + 𝑇𝑟𝑒𝑛𝑑 + 𝜀𝑡 Lagged dependend variable to capture the addiction of cigarettes: 𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + µ3 𝑙𝑛𝐶𝑡−1 2 3 4
  7. 7. Methodology used to perform the analysis 7 Similtaneity problem has been tested through Hausman test between Cc and Pc Estimated Pc(Y,TER) Gave predicted residual by subtracting Pc from its estimated value Added predicted residual as independent variable to get 2nd regression The significance of predicted residuals parameters implies simultaneity Used Excise tax as an instrumental variable
  8. 8. The new policy led to reduction in cigarettes consumed, this reduction was mainly driven by imported cigarettes Since 2010/11, total sale of cigarettes in Rwanda is driven by imports and it represents 68.4% in 2015/16 Led to considerable reduction of -17.4%. But total sale of cigarettes is raising at decreasing rate in other years This is explained by a decrease of -23% in imports since the yearly contribution is>60% The new policy of July 2015 has approximately doubled the cigarettes price This reduction met the MINISANTE target
  9. 9. 9 Despite the decrease in 2015/16, cigarettes consumed is directly proportional with income per capita and prices. 0 5 10 15 20 25 30 0 100 200 300 400 500 600 700 800 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Cigaretteprice RealIncome&Cigarettes Cigarettes Consumed (in 'MillionsRwf) Income per Capita (in '000 Rwf) Prices Cigarette price appears stable with slight increases until 2014/15 Income per capita had been increasing Implying an increase in cigarette consumption until 2014/15 Even though per capita income increased, consumption reduced after the new policy This is because the increase in prices was larger than the increase in income Continual annual growth in aggregate consumption After the new policy, price increased and aggregate consumption decreased
  10. 10. Impact of new policy on total cigarettes in terms of elasticities 10 (1) (2) (3) (4) ln_quantity ln_quantity ln_quantity ln_quantity ln_price -0.532*** 0.452 -0.474** -0.515** (-3.12) (0.31) (-2.33) (-2.72) ln_income 0.450*** 0.250*** 2.755 0.387*** (5.94) (4.02) (1.59) (3.55) dummy -1.408 (-0.68) trend -0.0303 (-0.54) L.ln_quantity 0.0101 (0.05) _cons -5.649*** -6.367*** -11.05 -5.201** (-3.23) (-3.11) (-1.09) (-2.30) N 34 34 34 33 We opt Model 1 to explain the demand of Cigarette in Rwanda Price elasticity is between -0.474 and -0.532 and is in line with other studies in developing countries Implies that when price increases by 1%, demand for cigarettes drops by 0.532% and 0.474% Income elasticity of demand is 0.45 implies that when income increases by 1%, demand for cigarettes rises by 0.45% Positive coefficient for income means that cigarettes are normal goods i.e as income increases, consumption increases
  11. 11. Effect of tax on cigarette price (1) (2) ln_price ln_price ln_tax 0.981*** 0.104** (4.80) (2.57) dummy 1.441*** (35.47) _cons 1.427*** 1.831*** (8.88) (65.96) N 34 34 11 The after tax price depends on the before tax price and tax itself Quantity consumed depends on both price and tax! This led to endogeneity Hence, information on tax have been taken into account in order to know prices’ effects on quantity Results revealed that when tax increases by 1%, price increases by 0.981% or by 0.104% respectively for model 1 and 2
  12. 12. Price and income elasticities for local and imported cigarettes 12 We used same variables to estimate the new policy's effect separately on: Local cigarettes Imported cigarettes Price elasticity is -0.412 Income elasticity is 0.521 Price elasticity is -0.518 Income elasticity is 0.721 1% increase in price will reduce cigarette consumption by 0.412% and 0.518 respectively for local and imported cigarettes 1% increase in income will increase cigarette consumption by 0.521% and 0.721 respectively for local and imported cigarettes Briefly, price elasticity of imported cigarettes is more negative than that of domestic cigarettes Meaning that smokers are more responsive to price changes for imported cigarettes
  13. 13. Policy implications 13 High taxes can be a simple instrument to influence tobacco prices and its consumption Lead to an increase in retail price of cigarettes since tax increases tend to be passed on to consumers If prices are significantly different for tobacco products Consumers may choose cheaper cigarettes rather than reducing consumption Or to adopt both If they decide to switch to cheaper products, policy’s effect on consumption will be less We recommend: Tobacco policy control with continuing price increases since it makes cigarettes less affordable to juveniles and will lead to permanent reduction in consumption As the policy aims to reduce consumption and effective tax collection based on non manipulated tax bases; The government has to tighten surveillance to counter chances of smuggling since continual increase in prices may lead to the increase in illegal production and market smuggling Implement policy based on empirical findings in order to minimize errors in estimating policy's effects in terms of revenue collection
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