New GCC Tobacco Tax Could Lead To Illegal Trade

Ministers in the region are deliberating a 100 per cent increase in duty on tobacco products.

A 100 per cent increase in duty on tobacco products in the GCC may lead to increased illicit trade because of a sharp overnight rise in the cost of cigarettes, according to experts.

The ensuing problem could even grow beyond the control of police and customs authorities, stated a report, based on discussions between public and private sector leaders in the UAE.

The report comes amidst deliberations among GCC finance ministers to levy higher tobacco taxes to curb smoking levels.

Speaking at the roundtable, Omar Obeidat, partner and head of Intellectual Property at law firm Al Tamimi said: “You have to consider that a price increase will invite people to trade in counterfeiting.

“If you add on top of that the issue of smuggling, which is a by-product sometimes of tax increases, you’re going to have a double impact of counterfeiting increases plus smuggling increases. Smuggling affects the legitimate trade and hits the revenue of the government.”

Approximately 600 billion illegal cigarettes are sold each year worldwide, representing 11 per cent of the global market, said the report.

Illicit trade was “almost a tourist attraction”, in the UAE, said Bruce Budd, associate professor, College of Business at Saudi’s Al Faisal University, highlighting Dubai’s Karama shopping area and said that any further increase in illegal trading would be difficult to handle.

Major Dr Khalid Al Hassan, head of the Anti-Forgery section of the Economic Crime Department at the Dubai Police added that the UAE would also require more resources to handle the “knock on effects at border controls.”

“If you raise tax, illicit trade will begin and governments must then spend big sums of money to combat that illicit trade… We would have to close our borders and tell tourists not to come, until we find a solution”.

The rapid rise in number of smokers in the GCC is causing alarm: reports estimate that up to four million smokers in the region consume over 50 billion cigarettes annually and cost more than $500 million in health care.

However, a one-step, 100 per cent increase in duty on tobacco products will not significantly affect consumption levels or smoking propensity in this region, stated the report.

In the UAE, the majority of the population has a high income, so they don’t care about a price increase, said Dr. Khalid.

“The price of cigarettes is not expensive when compared to other areas of the world. A price increase may affect some nationalities with a low income, but for UAE locals and expatriates, they don’t care. I don’t think tax would be the solution to problem,” he said.

He suggested a phased-in increase over five years, as with the 1995 GCC tobacco tax. “I disagree with the sudden rises in taxes. Even when alcohol was banned, it was done in three stages.”

The paper also recommended that GCC authorities use education and awareness programmes to warn people – especially the youth – against the risks of smoking, removing the ‘cool factor’ from smoking, and reinforcing control by putting more barriers to smoking in public places.