Introduction

Article 6 and its guidelines for implementation of the FCTC stipulates that raising the price of tobacco products through taxation is effective and important means of reducing tobacco consumption by various population groups, in particular the young people. WHO calls on the governments of the Parties of FCTC to impose tax on tobacco products to achieve their health objectives and increase the tax periodically with reference to inflation and income growth, so as to reduce the affordability of tobacco products. Moreover, the World Bank depicted that reduction in smoking prevalence could lower the loss of productivity and medical expenditures caused by tobacco, bringing long-term benefits to both society and households.[1]

Increasing cigarette price by tax hike can encourage smokers to quit smoking and prevent ex-smokers from relapsing. Since the low-income group and the youth are less financially capable in general, they are usually more sensitive to the price of tobacco products. All in all, the low-income group will have more incentive to quit smoking and reap more health and economic benefits than the high-income group when the tax on tobacco products increases.

WHO recommends that tax should constitute at least 75% of the retail price of tobacco products; while the World Bank suggests that the tax on tobacco products should account for 66% to 80% of the retail price in places where tobacco consumption has fallen.[2] A high tax burden (e.g. 75% of retail price) is essential for maintaining taxation as an effective tobacco control measure.

In general, the extent of tax increase will directly affect tobacco consumption. Every 10% increase in retail price will reduce tobacco consumption by 4% in high-income countries and 5% in low-and middle-income countries.[3] Moreover, researches show that increasing the retail price of tobacco products by 20% will reduce overall consumption of tobacco products by 10.4%, prevalence of adult tobacco use by 3.6%, and initiation of tobacco use by young people by 8.6%.[4]

Evidence shows that tobacco companies tend to maintain the price of the cheapest cigarettes to offset the tax increase (which means the increase in tax amount would not be fully reflected in the retail price immediately), as a measure to sustain the smoking habit in low-income group.[5][6] Significant tax increase can help prevent tobacco companies from maintaining the sales volume through pricing strategies and restrain smokers from down-trading to cheaper cigarettes instead of quitting.

Experience outside Hong Kong

Across the globe, there is not a standardised tax regime for tobacco products. The proportion of tax to the retail price of tobacco products usually factors in multiple tax categories in its calculation. As various tax regimes are adopted in different countries, some countries will impose more than one type of tax on tobacco products, such as imposing both import tax and customs tax at the same time. For ease of representation, the following paragraphs refer all kinds of tax related to tobacco products as tobacco duty.

Regular adjustment of tobacco duty can ensure that the retail price of tobacco products maintains at a high level and discourage tobacco use. Some of the tobacco duty adjustment mechanisms and experiences are listed below -

Local situation

Tobacco is one of the dutiable commodities. According to the Dutiable Commodities Ordinance, tobacco products for local sale are not subject to additional taxes after the duty payment has been settled when being imported. The Government announced in the 2023-24 Budget that tobacco duty would be increased by 31.48%. The duty rate per cigarette stick would be increased by $0.6 to $2.506 per stick, and the duties on other tobacco products would be increased by the same proportion. According to the latest figures in 2023, the retail price of a pack of cigarettes is about $78, which implies the proportion of duty to retail price is under 65%. This figure is far lower than the recommended level of 75% by WHO. The proportion of duty to the retail price of cigarettes in Hong Kong is obviously below those in other countries such as New Zealand (82%) and Australia (75%).

Chart 3.1：Proportion of tobacco duty to retail price in Hong Kong

Chart 3.2：Comparison of tobacco duty between New Zealand, Australia and Hong Kong

In consideration of the factors such as currency and purchasing power, the retail price of cigarettes (in international dollars in 2020) is as follows[16]

Chart 3.1: Retail price of cigarettes (in international dollars in 2020)

According to the rationale of the Purchasing Power Parity, the value of the same good in different places should be equal after converting to international dollars. However, Table 3.1 shows that the price of cigarettes in Hong Kong is clearly more affordable than that in New Zealand and Australia after taking into account the cost of living and purchasing power of different places. Considering that the majority of the current smoking population is composed of lower income earners, a low or relatively affordable cigarette retail price is not conducive to further reducing the smoking prevalence.

However, the overall import statistics for cigarettes in Hong Kong shows that, despite having a gradual decrease in smoking prevalence, a trend of increase in cigarette consumption was recorded over the past decade. Records show that the quantity of imported cigarettes increased from less than 3 billion sticks in 2012 by 30% to over 4 billion sticks in 2022, showing an increase in demand for tobacco products in the market over the period when the level of tobacco duty remained stagnant (2015-2022). Furthermore, the experience in 2009, 2011 and 2014 indicated that the greater the tax hike, the larger the increase in call volume to the DH's Quitline, showing that the increase in duty provides a strong incentive for smokers to quit smoking.

Chart3.3：Number of cigarettes imported（2011-2022）

Introduction

At present, the Smoking (Public Health) Ordinance stipulates that no person shall sell tobacco products to persons under the age of 18, and no person shall, for the purposes of promotion or advertisement, give any tobacco products to any person. As smoking often begins in adolescence, some of the countries have raised the minimum legal age for tobacco purchase to 20 or even higher. Some countries even proposed to have a “tobacco-free generation” through prohibiting the sale of tobacco products to persons born after a certain cut-off date. This measure aims to impose a lifetime ban to persons who have yet to turn into adult when the relevant ordinance is enacted from purchasing tobacco products, so as to prevent them from picking up smoking.

Experience outside Hong Kong

Policy in different overseas regions on the minimum legal age for the sale of tobacco products -

Local situation

With the efforts on education and publicity over the years, the smoking prevalence of youth has dropped to a low level. Smoking population aged between 15-29 years constitutes less than 10% of the total smoking population in Hong Kong. The daily cigarette smoking prevalence of youth aged 15-19 decreased from 2.5% in 2010 to 1.0 % in 2017[18]. In the survey conducted in 2019 and 2021, the number of daily cigarette smokers in this age group was too small for an accurate estimate of smoking prevalence. Such low prevalence should be attributed to the concerted efforts made by various parties (such as non-governmental organisations, schools, teachers and parents) and the Government which have protected the youth from tobacco hazards. Nevertheless, the survey shows that the prevalence of ever smokers among Secondary 1 to 6 students was 7.4% in 2021, reflecting that there are still a significant number of students who would experiment with smoking out of curiosity, while minors still have access to tobacco products under the prevailing regulations.[19]

Given the very low prevalence in the 15-19 years group, and a prevalence of only 2.6% in persons below the age of 25, raising the legal age for purchasing tobacco products to 21 or above will unlikely have significant impact on reducing smoking prevalence and preventing young people from smoking. However, we still need to be prepared and avoid teenagers from gaining access to tobacco products, as well as preventing smoking initiation out of curiosity that may create dependence on tobacco products.

Introduction

WHO opins that, the negative impact of duty-not-paid cigarettes not only causes reduction in government revenue, but also weakens the effectiveness of tobacco control work due to providing smokers with cheap tobacco products. With reference to Article 15 of the FCTC, WHO recommends that the Parties should implement further measures, including establishing a licensing system or regulating the production and distribution of tobacco products in order to intercept any illicit tobacco activities.

Experience outside Hong Kong

Different regions have adopted various ways to combat illicit cigarette activities, which include –

Local situation

According to the Dutiable Commodities Ordinance, any person who import, export or manufacture tobacco products must apply for relevant licences from the Customs and Excise Department (C&ED). For revenue protection and control of dutiable commodities, a relevant licence issued by the C&ED is required for:

• the importation, exportation or manufacturing of dutiable commodities; and
• the storage of dutiable commodities which are not exempted from duty and on which duty has not been paid.

Also, a relevant permit is required for removal of dutiable commodities.

Duty has to be paid upon delivery of the dutiable goods from the importing carrier or bonded warehouse to local market. The Office of Dutiable Commodities Administration of C&ED performs duty assessment on the dutiable goods. A removal permit for duty-paid goods will be issued upon payment of duty.

Smuggling is a serious offence. Under the Import and Export Ordinance, any person found guilty of importing or exporting unmanifested cargo is liable to a maximum fine of $2 million and imprisonment for seven years. It is an offence to buy or sell illicit cigarettes. Under the Dutiable Commodities Ordinance, anyone involved in dealing with, possession of, selling or buying illicit cigarettes commits an offence. The maximum penalty upon conviction is a fine of $1 million and imprisonment for two years. Currently, the offences under the Dutiable Commodities Ordinance are not listed in the Schedule to the Organized and Serious Crimes Ordinance and therefore the C&ED is unable to apply for confiscation of illicit proceeds related to illicit cigarette activities under the Organized and Serious Crimes Ordinance.

As for combating illicit cigarette activities, effective law enforcement is proved to have played a role. C&ED has all along been adopting an intelligence-based approach, complemented by risk management and state-of-the-art customs equipment, and employs a holistic strategy through intercepting smuggling in upper stream, smashing storage in mid-stream, raiding peddling activities in lower stream, to allocate resources flexibly to combat different types of illicit cigarette activities. C&ED will continue to strengthen its risk assessment and intelligence analysis, and enhance intelligence exchanges with the Mainland and overseas law enforcement agencies in order to combat illicit cigarette activities at source.

Chart 3.4: Quantity of illicit cigarettes seized (2012-2022)

The quantity of illicit cigarettes reached an all-time high in a calender year at 732 million sticks in 2022. Due to the epidemic, the tightened global supply chain has led to delays in transportation and increases in costs. Therefore, illicit cigarette syndicates tended to smuggle a large number of illicit cigarettes into Hong Kong by sea each time and increase the stock of illicit cigarettes to stabilise the supply. The C&ED’s law enforcement strategy of strengthening intelligence analysis and tackling at source has proved to be effective. C&ED has repeatedly intercepted smuggling syndicates when they replenished their supply, resulting in a record high in the number of illicit cigarettes seized last year. A total of 28 in-bound mega cases (those among which results 500 000 cigarettes or above) were detected in 2022, which was an increase by 1.3 times compared to 2021, among which results in the seizure of about 585 million cigarettes.

Introduction

In recent years, ASPs are becoming increasingly popular worldwide. Tobacco companies continually promote ASPs including electronic cigarettes and heated tobacco products, and claim that the use of ASPs is less harmful or even beneficial to smoking cessation. Indeed, the use of ASPs is no less harmful than conventional tobacco products.

Local situation

Despite ASPs have been on the market for a relatively shorter period than conventional tobacco products, more and more countries have regulated or banned ASPs through legislation. To prevent ASPs from taking root in Hong Kong, the Government introduced the Smoking (Public Health) (Amendment) Ordinance 2021 which came into effect on 30 April 2022. The Ordinance stipulates that no person may import, promote, manufacture, sell or possess for commercial purposes of ASPs, including electronic cigarettes, heated tobacco products and herbal cigarettes. Offenders are subject to maximum penalty at a fine of $2,000,000 and imprisonment for 2 years. However, possession of ASPs for self-use is not against the law at the moment.

For the import of ASPs, the DH received over 300 referral cases from C&ED in 2022 concerning import of ASPs by inbound travelers, and over 310 cases related to parcels and cargoes, with over 60 summons served to the offenders. For in-town enforcement, DH would follow up on each complaint or referral case from other law enforcement agents. In 2022, the DH received 430 referrals and complaints for sale or offer to sale of ASPs, with 14 summons served to the offenders.

Experience outside Hong Kong

As ASPs have been on the market for a shorter period than conventional tobacco products, some regions are still developing a regulatory regime applicable to ASPs.