Effect Of The Taxation System On China s Tobacco Industry

Under the taxation system, majority of the taxes goes to the central government while revenue from some tax categories is shared with the local government. This revenue-sharing setting guarantees that the financial incentive of local government is aligned with that of the central government. Specifically in the tobacco industry, there are two levels of taxes collected ï ¿ ¼! 10! corresponding to the two stages of cigarette production, a tobacco leaf tax and a cigarette tax. Despite that tobacco leaf belongs to the category of agricultural commodity, the Ministry of Agricultural in China has no jurisdiction over the tobacco industry; instead, STMA and CNTC have full control over tobacco leaf production and cigarette manufacturing (Hu et al.,†¦show more content†¦Since 1994, a value-added tax has been collected at the cigarette manufacturing level and an additional cigarette tax, which is known as the consumption tax, has been levied at the wholesale level. In 2001, the MOF and SAT revised the cigarette consumption tax rate into two components: a specific excise tax and a producer price-based ad valorem tax3. In May 2009, the Chinese government announced another adjustment to the cigarette tax rate schedule and a new 5% !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3 Producer price refers to the internal price that the distribution sector of CNTC pays to cigarette manufacturers. ï ¿ ¼! 11! excise tax was added for all cigarettes at the wholesale level (Liu et al., 2014). Since then, the cigarette tax system has become the combination of a producer value-added tax, a specific excise tax, an ad valorem tax and a wholesale tax. Table 1 gives a summary of the tax structure and revenue beneficiaries in China’s tobacco industry. ï ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Type of Tax/Tax Base Table 1. Tobacco Tax Structure in China Tax Rate Revenue Beneficiary 100% local government 75% central government 25% local government 100% central government 100% central government 100% central government ï ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼Ã¯ ¿ ¼1. Tobacco leaf tax (since 2006) 2. Value-added tax at cigarette manufacturers (since 1994) 3. Consumption tax at wholesale level i) Specific