There are several types of tobacco products that are taxable on the regional market. Table 3 below presents the tariff and statistical nomenclature of tobacco products subject to taxation in the ECOWAS region.
Table 3: Nomenclature and tobacco products
Tariff and statistical nomenclature (HS 2017)
|
Products
|
2402.10.00.00
|
Cigars and cigarillos containing tobacco
|
2402.20.00.00
|
Cigarettes containing tobacco
|
2402.90.00.00
|
Cigars, cigarillos and tobacco substitutes
|
2403.11.00.00
|
Water pipe tobacco
|
2403.19.00.00
|
Other smoking tobacco containing tobacco substitutes in any proportion
|
2403.91.00.00
|
Homogenized or reconstituted tobacco
|
2403.99.10.00
|
Expanded tobacco husks
|
2403.99.90.00
|
Chewing tobacco, snuff, press or sauce tobacco, tobacco extracts and sauces, manufactured tobacco substitutes
|
Source: new ECOWAS directive C/DIR.1/12/17
The tobacco products described in this table are necessarily subject to mixed taxation: an ad valorem duty and a specific duty. In practice, this combination of taxes is rarely deployed in the Economic Union, probably due to a lack of political will or the weakness of tax administrations.
The tax base for the ad valorem duty is composed of:
- on import, by the customs value plus the duties and taxes levied on entry, excluding value added tax (VAT) and excise duties.
- for locally manufactured products, by the ex-factory selling price or the cost of production, excluding VAT and excise duties.
The taxable amount of the specific duty is composed of:
- per rod, for cigarettes, cigars and cigarillos.
- by weight expressed in kilograms, for all other tobacco products.
Table 4 below presents details of taxes on the most popular brand in the various countries of the economic zone. It provides an analysis of the main tax instruments used and their operating mechanisms in order to better understand the taxation of tobacco products in the subregion.
Table 4: Taxes on top selling brand (% of retail price) in 2017 (before the new directive)
Country
|
Price of a pack of 20 cigarettes
|
Local currency
|
special rate
|
Ad valorem rate
|
VAT
|
Customs duties
|
Other taxes
|
Benin
|
500
|
XOF
|
|
40%
|
1,40%
|
|
0,37%
|
Burkina Faso
|
750
|
XOF
|
|
30%
|
15,25%
|
|
|
Cape Verde
|
180
|
CVE
|
|
10%
|
3,35%
|
5,18%
|
0,07%
|
Ivory Coast
|
700
|
XOF
|
|
35%
|
15,25%
|
|
2,14%
|
Gambia
|
60
|
GMD
|
33,33%
|
30%
|
6,57%
|
1,74%
|
4,67%
|
Ghana
|
4,99
|
GHS
|
|
150%
|
14,89%
|
|
0,34%
|
Guinea
|
3500
|
GNF
|
|
15%
|
6,35%
|
5,17%
|
0,71%
|
Guinea-Bissau
|
500
|
XOF
|
|
25%
|
1,92%
|
1,27%
|
0,15%
|
Liberia
|
120
|
LRD
|
|
35%
|
9,09%
|
1,43%
|
0,14%
|
Mali
|
800
|
XOF
|
|
25%
|
9,19%
|
6,51%
|
0,81%
|
Niger
|
500
|
XOF
|
|
40%
|
15,97%
|
|
0,86%
|
Nigeria
|
220
|
NGN
|
9,09%
|
20%
|
4,76%
|
|
|
Senegal
|
700
|
XOF
|
|
45%
|
15,25%
|
|
|
Sierra Leone
|
5000
|
SLL
|
|
0%
|
13,04%
|
|
0,08%
|
Togo
|
600
|
XOF
|
|
40%
|
15,25%
|
|
0,53%
|
Source: WHO, 2019
At the global level, taxation policies for the best-selling brand of tobacco products can be classified into two distinct groups: a group in which countries apply no significant taxation, namely Cape Verde, Guinea, Guinea Bissau, Nigeria and Sierra Leone, and another majority group in which taxes are very low, namely Burkina Faso, Côte d'Ivoire, Gambia, Mali, Niger, Senegal and Togo. Ghana has the highest tax rate in the economic zone, probably to show a real political will to fight against tobacco use. From these lessons, the countries adopt different tax policies but the challenges they face are relatively the same. In the short to medium term, they will need to examine the relationship between market structures and taxation to determine an optimal tax regime. The effectiveness of a tax system depends on a few factors, including the extent to which firms pass on increased taxes to their customers. This pass-through depends on the structure of the taxes but also on the configuration of the market, which may or may not give market power to incumbent firms [7]. This pass-through depends on the structure of the taxes but also on the configuration of the market, which may or may not give market power to incumbent firms [7]. The sub regional market is characterized by oligopolistic competition, while domestic markets are dominated by a private quasi-monopoly, except in Cape Verde where it is public[1].
Most international firms produce mainly high-end cigarettes, while local manufacturers are more focused on the production of economy cigarettes. Although these two categories are relatively homogeneous in terms of quality, the selling prices offered are different. This distinction can tell us something about the political will to tax, for which the economist's role is to propose regulatory tools to the legislator. Thus, the legislator's normative interventions may aim to increase tax revenues. Since tax levels differ between countries in the economic zone, the need to harmonize them leads to the question of the type of tax to be applied according to the structure of the market. While in perfect competition, the two taxes generally lead to an identical result in terms of price, profit and tax revenue [8], insofar as they directly and fully affect the selling price [9], this is not the case in imperfect competition. Indeed, if the public authorities want to carry out a public health action, it seems more coherent to apply a tax on the quantity and not on the price of cigarettes, because a specific tax would only affect usage, whereas an ad valorem tax would only increase the price [10]. Regardless of the type of tax considered, to discourage smokers from switching to cheaper brands if the most consumed brand increases, a minimum collection price and/or a merger of tax levels can be imposed to try to achieve this objective. European countries, in their tobacco control efforts, apply a combination of taxes combined with a minimum tax, whereas for ECOWAS countries, even though the various EU directives recommend combining the two taxes, this combination is not widely deployed: among these 15 countries, Cape Verde, Gambia, Guinea-Bissau and Nigeria are the only ones to apply a specific tax in addition to the ad-valorem tax, and Senegal is the first country, at present, to have recently imposed [2]this minimum tax. The usefulness of this mixed strategy combined with a minimum tax is that it equalizes the price increase across all brands, forcing smokers to quit rather than switch to another brand. It is also intended to discourage cross-border purchases between neighboring countries. As things stand, within ECOWAS, while it is recognized that it is difficult to predict the impact, both in prevalence and intensity, of a price increase on consumption, while taking into account the willingness to pay of drug users and/or the poor because they are less inclined to give up consumption, it appears necessary for policy makers to look upstream at the links between taxation, public health, and excise revenues.
The link between tobacco taxation, public health and excise revenues is not just theoretical. Indeed, several recent empirical studies, cited in the WHO Technical Manual on Tobacco Tax Administration [3]or in the World Bank Group Consultants' Toolkit on the Economics of Tobacco[4] Taxation, point out that in all countries of the world, low-income smokers are more sensitive to price changes and are therefore more likely to quit smoking [11]. In this sense, econometric studies clearly show that increasing tobacco prices through taxation leads to a reduction in overall tobacco consumption, smoking prevalence and frequency of use. Moreover, the effect is particularly strong among young people and people with low incomes [12]. The elasticity of demand is estimated to be between -0.2 and -0.6 and concentrated around -0.4 for high-income countries, while it is between -0.2 and -0.8 and concentrated around -0.5 for low-income countries [12]. A 10% increase in cigarette prices is expected to reduce demand by 4% for high-income countries and 5% for low-income countries [12].
All else being equal, the more inelastic the demand, the greater the tax revenue surplus, regardless of the excise regime applied [11]. Finally, it seems that tobacco price increases resulting from higher taxes have more beneficial effects on the health of low-income people. This relationship is poorly documented for ECOWAS countries. A study conducted by the Consortium for Economic and Social Research (CRES) points out that The Gambia, which applies a specific duty (rarely applied by EU countries), recovers more than 60% of tobacco excise revenues [7]. The ongoing study for Ghana may shed more light on this link, as the country adopts an aggressive tax strategy precisely to increase government tax revenues.
[1] The Cape Verdean government has exclusive import contracts.
[2] http://www.droit-afrique.com/uploads/Senegal-LF-2018-rectificative.pdf)
[3]https://apps.who.int/iris/bitstream/handle/10665/44316/9789241563994_eng.pdf;jsessionid=378B273D8B27FD09A6FD7DD51D99B1D7?sequence=1
[4]http://documents.worldbank.org/curated/en/926851541190614820/pdf/Economics-of-Tobacco-Taxation-Toolkit.pdf