Explanatory Memorandum
(Circulated by the Authority of the Minister for Justice and Customs, Senator the Honourable Amanda Vanstone)Regulation impact statement
Introduction of the Per Stick measures on Tobacco and the definition of tobacco leaf
Previous tobacco excise arrangements encouraged the manufacture of low value, low weight cigarettes in large packets. This taxation advantage has skewed consumption towards higher volume, lightweight cigarettes, which experts consider more harmful on health grounds. As a result the government announced in A New Tax System (ANTS) in August 1998 the introduction of a per stick rate of duty explained below. This measure was incorporated in Excise Tariff Proposal No. 2 (1999) and commenced on 1 November 1999. Complementary legislation for imported tobacco products was implemented in Customs Tariff Proposal No. 6 (1999).
The 'per stick' arrangement was announced as part of the ANTS package. The per stick rate of duty of $0.18872 will apply to cigarettes, cigars, bidis and other tobacco marketed in stick form containing not more than 0.8 grams per stick tobacco content. All other tobacco products will pay duty at a rate of $235.90 per kilogram of tobacco content. Products subject to this weight based rate will include roll your own and pipe tobacco, heavy cigarettes, cigars and other stick form tobacco products containing more than 0.8 grams per stick tobacco content. These rates are subject to indexation following release of the CPI, usually in February and August.
The new excise and customs rates have been formulated based on health experts' advice and best practice experiences from other countries. This new approach will address community health concerns and further streamline the current administration and collection mechanisms. The 'per stick' rate has been set so that the excise per kilogram of tobacco on a stick of tobacco will be the same as the excise on a kilogram of loose tobacco.
1. Assessment of impacts (costs and benefits) of each implementation option
1.1 Impact group identification
As the change will result in an increase in the rate of duty for certain tobacco products, particularly lightweight cigarettes, usually packed in high volume packs (i.e. 40's and 50's). This should result in tobacco manufacturers adjusting wholesale prices of tobacco products and realigning their product lines following the removal of the taxation advantage. It is anticipated that this will decrease consumer demand for cigarettes, particularly with the likely removal of light weight, high volume cigarette packs from the market.
The changes will involve some minor compliance costs. This will involve initial costs in adjusting computer programs for the rate changes. On an ongoing basis, there will be some compliance costs in terms of additional weighing. It will also be necessary to provide sample details for ATO monitoring on a six monthly basis, however, this information would generally be used for internal quality control purposes in any case. Manufacturers will now be required to supply information regarding manufacturing weights of both tobacco and non tobacco components on a regular basis.
There will however also be compliance costs savings as there will no longer be the requirement to produce six monthly weight reconciliation statements unless the tobacco content is more than 0.8 grams. It will no longer be necessary to adjust computer systems every time the wholesale list price of tobacco products change. In addition weighing and quality testing such as moisture testing will not be required by the ATO where the stick has less than 0.77 grams tobacco content.
The introduction of a definition of tobacco is favoured by tobacco manufacturers and producers as a means to reduce illicit tobacco production which disadvantages legitimate producers and manufacturers.
Tobacco retailers may also experience a fall in demand for cigarettes particularly light weight, high volume brands and may also need to change stock levels of certain brands in response to consumer demand. As the duty is paid by the tobacco manufacturer, there will not be a change in compliance costs.
Individuals who smoke tobacco products will be affected by the change in excise duty depending on which brands they smoke. However, this is in line with the policy intent of the change which has been introduced for health reasons.
The changes will impact on the ATO and Customs who will administer it. There are some costs in implementing the measure which includes imposing quotas as a revenue protection measure and subsequent monitoring of information provided by manufacturers prior to implementing the per stick arrangements. However, there will be some savings in the longer term as calculations of duty will be made simpler due to the abolition of wholesale list prices rates.
1.1 Identification of costs and benefits
The tobacco industry is highly concentrated, with only three major domestic tobacco manufacturers and importers. This industry utilises a high degree of automation and computerisation. The initial cost of compliance in changing the tobacco tax base from volume to per stick, is estimated to be less than $1 million.
The initial compliance costs would primarily result from taxpayers familiarising themselves with the new legislation and adjusting computer programs for the rate changes. The tobacco industry has been consulted and has been aware of the proposed changes for over a year prior to the per stick arrangement being introduced on 1 November 1999. The per stick arrangements are also similar to those used for taxing tobacco in most other countries, where the parent tobacco companies operate.
The recurring compliance costs are estimated to be negligible. Whilst additional weighing and sampling is required, this information would generally be compiled by the taxpayer for internal quality control purposes.
There are some minor administrative costs for modification to computer systems for the Australian Taxation Office and Australian Customs Service in implementing the changes. However, once the changes are in place, these costs will be offset by reduced administrative costs due to the removal of the use of wholesale list prices in determining the rate of excise and clarification of the law as a result of changing the definition of tobacco.
The partial year impact of these changes in 1999-2000 is expected to provide additional revenue of around $300 million. In subsequent years the full year impact is expected to be additional revenue of around $440 million.
The policy is likely to reduce demand for cigarettes overall, and in particular light weight cigarettes, in favour of other goods and services. Lower cigarette consumption can be expected to result in lower health care costs to the community.
The policy of changing the basis of excise on tobacco was announced in August 1998 in the ANTS policy document. Therefore the tobacco industry has been aware of the proposed changes for over a year before the per stick arrangements were introduced on 1 November 1999 and have been consulted.
The tobacco industry have been consulted in relation to the definition of tobacco as part of the Illicit Tobacco Reduction Strategy.
Health groups have been advocating a change in the basis of excise on tobacco to a per stick basis for some time.
Conclusion and recommended option
This proposal will remove the taxation incentives which have encouraged consumption of large packets of light weight cigarettes. These are considered by health experts to cause more harm by encouraging higher consumption levels.