Research Findings of China’s Tobacco Tax Ji Liang Research Center for Fiscal Science, Ministry of Finance Lijiang, China Oct.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 DutyLevy 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 TaxLevy 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 TaxLevy 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 DutyLevy 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 TaxLevy 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 TaxLevy 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 Tobacco Tax Revenue (unit: 0.1 billion Yuan, %) YearTobacco Profit TaxPaid Financial Amount Paid Financial Proportion Financial Income Proportion ( ％ )

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 Tobacco Turnover Tax Revenue (unit: 0.1 billion Yuan, %) Year Increment Value Duty Consumption TaxTobacco TaxTotal Tobacco Consumption tax’s Proportion among Consumption Tax Turnover Tax of Tobacco Industry ‘s Proportion among Domestic Turnover Tax Revenue

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 billion Yuan, accounting for 14.6% of the total. HUNAN ZHONG YAN is the 3 rd 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.1 st, 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 1 st, 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 1 st,2001, tax calculation method and rate of cigarettes consumption 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 Tobacco Consumption Tax and Cigarettes Sales Quantity Year Consumption Tax (0.1 billion Yuan)Increasing rate (%) Cigarettes Sales Quantity (0.1 billion )Increasing rate (%)

Tobacco Consumption Tax and Tobacco Control in China Tobacco Consumption Tax Revenue for Tobacco Control: achieved certain effects but not obvious 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 assorted measures; –Tobacco monopoly system and cigarette price control greatly decrease 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 top 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.

THANK YOU