S. Korean cigarette tax hike higher than expected

December 3, 2014

By Park Si-soo

An unexpected bipartisan agreement to raise taxes on cigarettes by 2,000 won ($1.80) a packet has caught cigarette manufacturers, smokers and anti-smoking organizations as well as lawmakers by surprise.

“We are taken aback,” one industry watcher said Sunday, two days after the agreement was made. It was a near-consensus that the increase would be set at around 1,000 won, but the ruling and opposition parties made a last-minute deal ahead of the Dec. 2 deadline for the finalization of next year’s budget.

Some opposition party lawmakers still object to the agreement, raising the possibility that they might take some form of collective action against it in the process of legislation.

“It’s not over yet,” the insider said. “Things are still changeable.”

Another insider argued that the tax hike could compromise the government’s effort to use the increased portion to shore up budget shortfalls as it is expected to produce a steep fall in the smoking rate.

The bipartisan agreement, if legislated, would allow the government to slap 3,318 won tax per pack of 20 cigarettes from early 2015, up from current 1,550 won. Cigarette makers will also be obliged to pay 232 won to help cigarette retailers.

This would put cigarette makers in a dilemma.

They need to cut their margin to the bare bones in order to minimize the number of smokers who will quit because they can’t afford the higher prices. .

“I had expected the proposed tax increase of 2,000 won to face strong opposition, and lawmakers would reach agreement somewhere between 1,000 and 1,500 won. But I was completely wrong,” the insider said.

A rumor had it that a report on the tax increase to the CEO of the KT&G was delayed but it couldn’t be confirmed.

The ruling Saenuri Party accepted the opposition New Politics Alliance for Democracy’s proposal of scaling back corporate tax exemptions and reductions in return for the 2,000 won tax increase.

Other possible side effects include the illegal increased circulation of tax-free cigarettes on the domestic market, according to experts.

Some fear a further increase in cigarette smuggling.

The Korea Customs Service (KCS) recently said it confiscated a record amount of illegally circulated tax-free cigarettes worth 66.4 billion won in the first half of the year, more than the 43.6 billion won confiscated throughout 2013.

Cigarettes produced for the military and exports are exempt from taxation. But those products are increasingly being funneled into the domestic market as the government moves to revise the law, according to the KCS.