LCQ16: Tobacco duty
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Question:
It has been reported that smoking prevalence has been reduced slightly from 9.5 per cent to 9.1 per cent, following the Government's measures to increase tobacco duty by 31.48 per cent and 31.92 per cent in 2023 and last year respectively. Some members of the community have pointed out that while an increase in tobacco duty by more than 30 per cent should have brought substantially more tax revenue since there has not been any significant decrease in the number of smokers, the revenue from tobacco duty dropped from $7.93 billion before the duty increase in 2022-2023 to $7.25 billion afterwards in 2023-2024, and the tax revenue reduced even more significantly last year after the Government drastically increased tobacco duty again. In this connection, will the Government inform this Council:
(1) of the monthly revenue from tobacco duty in the past three years (set out in the table below);
| Month | 2022 | 2023 | 2024 |
| January | |||
| …… | |||
| December |
(2) whether it has examined the reasons for reduction in the Government's revenue from tobacco duty; whether it has assessed (i) the amount of revenue from tobacco duty reduced each year as a result of the increase in tobacco duty in 2023 and last year, and (ii) how much of such amount may be channelled to the market of illicit cigarettes; if it has assessed, of the details; if it has not assessed, the reasons for that;
(3) of the number of illicit cigarettes seized, the market value of such illicit cigarettes and the number of persons arrested in each month of the past three years;
(4) of the respective numbers of persons prosecuted by the Government for (i) trafficking and (ii) purchasing illicit cigarettes, as well as the penalties imposed on the convicted persons, in each of the past three years; and
(5) whether it will consider restoring the tobacco duty rate to the level prior to the duty increase last year, with a view to bringing the revenue from tobacco duty back to the previous level, thereby increasing the Government's revenue by billions of dollars and at the same time minimising the benefits brought to lawbreakers; if so, of the details; if not, the reasons for that?
Reply:
President,
Having consulted the Financial Services and the Treasury Bureau and the Customs and Excise Department (C&ED), the consolidated reply to the various parts of the Hon Shiu Ka-fai's question is as follows.
Hong Kong is facing an ageing population and a continuous rising number of chronic disease patients. Numerous scientific studies have shown that smoking is the most important and preventable risk factor leading to chronic diseases and deaths. According to the estimation of the World Health Organization (WHO), the global economic loss caused by tobacco products amounts to US$1,800 billion annually, and a research of the University of Hong Kong in 2021 also revealed that the economic loss resulting from tobacco-induced health problems was estimated to be about HK$8.2 billion every year. It is therefore beyond doubt that smoking brings harm to the economy. On the contrary, that tobacco control harms the economy is disinformation created by the tobacco companies.
The results of the Thematic Household Survey (THS) on smoking pattern in 2023 conducted by the Census and Statistics Department showed that there are about 580 000 people in Hong Kong who are still daily smokers of conventional cigarettes, and nearly half of them are aged between 40 and 59. Smoking-induced diseases suffered by smokers who continue to smoke will pose a heavy burden on the healthcare system. In order to stop the tobacco hazards, the Government need to curb the use of tobacco and more importantly, prevent the public, especially the younger generation, from picking up smoking habit. Increasing tobacco duty is recognised internationally as the most effective means of reducing tobacco use. Through raising the costs of smoking, it provides a greater incentive for smokers to quit smoking, and dampens the eagerness of non-smokers, the youth in particular, to smoke.
Following an increase of tobacco duty by 60 cents in 2023-24, the Government has raised the tobacco duty by another 80 cents to $3.306 per stick in 2024-25. The measure can ensure that tobacco prices are maintained at a relatively high level which help prevent a rebound in smoking prevalence upon lifting of the mask-wearing requirements after resumption of normalcy after the epidemic, conveying a clear message to the society on the Government's commitment and determination to safeguard public health through stringent tobacco control measures. The effectiveness of tobacco duty adjustment should be evaluated by whether it can effectively control and reduce the number of smokers, rather than the amount of additional revenue it brings to the Government.
Past experience in increasing tobacco duty indicated that increasing tobacco duty is conducive to reducing smoking prevalence. The greater the tax hike, the greater the drop in smoking prevalence. The number of calls to the Department of Health's Integrated Smoking Cessation Hotline (Quitline) immediately after the increase in tobacco duty is also a sensitive indicator of smokers' response (i.e. their intention to quit smoking) to the duty increase. In the first month after the duty increase was announced in the 2023-2024 and 2024-2025 Budget, the number of calls to the Quitline increased by about three times respectively when compared to the monthly number of calls received in the previous three months, reflecting the strong intention of smokers to quit smoking as a result of the duty increase. The number of calls received by the Department of Health's Quitline increased from about 7 400 in 2022 to about 9 300 in 2024, representing an increase of more than 20 per cent.
The tobacco duty revenue, as well as smoking prevalence/smoking consumption and arrival passengers statistics from 2018 to 2024 are set out at Annex I. As 2020-22 was within the epidemic period, the pre-epidemic situation of 2018-19 is also presented for ease of comparison. The figures revealed that the number of duty-paid cigarettes and tobacco duty revenue in 2024 have decreased by about 39.4 per cent and 23.0 per cent respectively compared with 2023, and by 46.7 per cent and 18.5 per cent respectively when compared with 2019 (i.e. before the epidemic).
Tobacco duty revenue is collected from tobacco products as a dutiable commodity imported into Hong Kong, and therefore the amount of revenue generated is affected by many factors. Apart from the local sales volume of duty-paid tobacco products, it also depends on the commercial decisions of tobacco companies such as pricing strategies, timing of import and quantity, storage capacity of duty-paid tobacco products (there are no relevant figures as the commercial behaviour of tobacco companies is not transparent), as well as tobacco products purchased, by arrival passengers, outside Hong Kong or at duty-free shops at border control points and brought into Hong Kong (whether legally or illegally (Note)). Cross-boundary travel was greatly affected during the epidemic and the public were unable to bring back duty-free cigarettes through border control points. Tobacco duty was about 20 per cent higher than that before the epidemic, indicating that cross-boundary passenger travel has a great impact on tobacco duty. The number of passenger arrivals in 2024 was close to 150 million, which has fully restored to the pre-epidemic level, with the number of passenger arrivals at land boundary control points being close to 125 million exceeding the pre-epidemic level. It is estimated that the tobacco products brought into Hong Kong by inbound passengers will inevitably have a significant impact on tobacco duty revenue.
At the same time, the local sales volume of duty-paid tobacco products is also affected by the smoking population and their average consumption, whereas the increased cost of smoking will reduce the consumption of tobacco products. The WHO pinpoints that every 10 per cent increase in cigarette price will reduce the overall tobacco consumption by four per cent in high-income regions. In aggregate, tobacco duty was raised by 73.5 per cent in 2023 and 2024. Following the increase of tobacco duty in 2023, the THS conducted from May to August in the same year revealed that smoking prevalence dropped from 10.2 per cent in 2019 and 9.5 per cent in 2021 to 9.1 per cent in 2023. The number of smokers is estimated to have decreased by 60 600 or 9.5 per cent. The number of cigarettes consumed by smokers per day also dropped from 12.7 sticks in 2019 and 2021 to 12.1 sticks in 2023, which together represented a 13.8 per cent reduction in tobacco consumption. The Government has further increased tobacco duty in 2024 and the relevant THS will be conducted at a later time. It is expected that the drop in demand for tobacco products would be reflected in the survey results.
On the other hand, illicit cigarettes activities have always existed and the rebound in cross-boundary freight after resumption from the epidemic might also lead to increase in illicit cigarettes activities. That said, industry statistics from international market research companies revealed that the sales of illicit cigarettes in Hong Kong did not show an upward trend. As a matter of fact, both the WHO and the World Bank have pointed out that there is no direct correlation between the increase in tobacco duty and illegal tobacco trade activities. Combatting illicit cigarette trading activities and raising tobacco duty should be regarded as complementary measures. Taking into consideration the above factors, we are of the view that the drop in tobacco duty is attributable to a number of factors. The full effect of tobacco duty in reducing tobacco use is to be ascertained subject to the availability of latest data, and at this stage, we cannot rule out the possibility that some of the revenue from tobacco duty may be lost as a result of illicit cigarettes activities, but there is no evidence to suggest that illicit cigarettes activities are the main cause of the drop in tobacco duty.
In any case, as an important pillar under the tobacco control strategy, the Government will spare no efforts in combatting illicit cigarettes. The C&ED will continue to adopt a multi-pronged approach and take stringent enforcement actions at all levels to combat the sale of illicit cigarettes. The monthly tobacco duty revenue and the relevant enforcement figures against illicit cigarettes (including smuggling, storage and distribution as well as sale) in the past three years are set out at Annex II. The increase in the number of seizures of illicit cigarettes reflects the effectiveness of the C&ED's stepped-up enforcement actions against illicit cigarettes and the success of its enforcement strategy does not denote an expanding scale of illicit cigarettes activities.
The Government announced the "10 measures for tobacco control" in June last year. Stepping up enforcement against illicit cigarettes was accorded the highest priority among the 10 measures, including –
(i) introducing a duty stamp system to distinguish duty-paid cigarettes from non-duty-paid cigarettes;
(ii) requiring tobacco products being sold at a price lower than the tobacco duty need to be proved duty-paid;
(iii) increasing the maximum penalty for handling, possessing, selling or buying duty-not-paid cigarettes; and
(iv) listing the relevant offences under the Organised and Serious Crimes Ordinance (Cap. 455), so as to enable the C&ED to apply for freezing and confiscating illicit proceeds and assets associated with illicit cigarette activities by virtue of the Ordinance.
On duty stamp system, taking into account factors such as enforcement effectiveness and cost-effectiveness, we propose to require the affixing of duty-paid labels on the retail packages of cigarettes at this stage. Through the application of anti-forgery features and related digital technologies, frontline officers of the C&ED would be able to distinguish duty-paid cigarettes from duty-not-paid ones in a more effective manner, thereby enhancing enforcement efficiency. The C&ED expects that a pilot scheme on the duty stamp system will be rolled out in the middle of this year to work out the practical operating requirement of the scheme, which will then be launched next year at the earliest.
The Government expects that the above measures will increase the deterrent effect and enhance the effectiveness of law enforcement departments in combating illicit cigarettes. The Government will continuously review the effect of tobacco control measures as a whole and the pace of future adjustments in tobacco duty. Our ultimate aim is to further lower the smoking prevalence so that the whole society and our healthcare system does not have to pay a heavy price for smoking-related diseases.
Note: Under the Dutiable Commodities Ordinance (Cap. 109), a person aged 18 or above may bring into Hong Kong 19 cigarettes duty-free for his own personal use.
Ends/Wednesday, February 12, 2025
Issued at HKT 19:10
Issued at HKT 19:10
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