Vape stakeholders urge balanced taxes to boost collection, curb illicit trade

MANILA, Philippines — The government should take a balanced approach to excise taxation as Congress explores ways to recover billions in revenues expected to be lost under a proposed income tax cut package, according to some lawmakers and industry experts.

To this end, stakeholders backed proposals to simplify the tax structure for vapor products during the Aug. 11 hearing of the House Committee on Ways and Means.

Excessively high rates could undermine collections and encourage illicit trade, they warned, as they also called for preserving risk-based taxation that differentiates cigarettes from less harmful alternatives.

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Risk-based taxation

Among the measures discussed was the Vape Tax Unification Bill (House Bill No. 5364), which was filed by Cagayan de Oro City Second District Rep. Rufus Rodriguez. The proposal would place nicotine salt and freebase nicotine vapor products under a unified tax structure.

According to Rodriguez, his team estimates that the measure could deliver average annual collections of P6 billion between 2027 and 2030. The proposal is also projected to improve compliance and bring illicit trade incidence down to as low as 10 percent by 2028.

The existing tax structure imposes sharply different rates depending on nicotine formulation. Nicotine salt products are taxed at about P60 per 1 ml, while freebase nicotine is taxed at P69.50 per 10 ml, equivalent to P6.95 per 1 ml.

Citing 2025 Bureau of Internal Revenue data, Rodriguez said that freebase nicotine products accounted for more than 90 percent of excise taxes collected in all vape categories.

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“No one is declaring their vape products as made of nicotine salt but instead declaring or misdeclaring the same as freebase nicotine,” Rodriguez said.

For Rodriguez, addressing the disparity is also consistent with a harm-reduction approach. He cited an August 2015 Public Health England review that estimated electronic cigarettes to be about 95 percent less harmful than smoking.

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“Risk-based taxation is not new. We use this principle when we provide less tax or zero tax to electronic vehicles vis-à-vis gasoline-type vehicles. In the same manner, less harmful cigarette alternatives should be taxed less,” Rodriguez said.

He also pointed to the country’s estimated 16 million smokers, a figure he said has not declined significantly over the past decade, while World Health Organization data indicate an annual quit rate of below 4 percent.

He further cited a 2023 cost-of-illness study estimating that if half of adult Filipino smokers shifted to smoke-free alternatives, the $9.8-billion annual cost associated with smoking-related illnesses could be reduced by 35 percent, equivalent to $3.4 billion.

Single rate tax for all products

A separate measure filed by Manila Second District Rep. Rolando Valeriano also seeks to eliminate the tax distinction between nicotine salt and freebase nicotine products.

Under House Bill No. 10289, all vapor products would be subject to a P15-per-milliliter excise tax beginning in 2027, regardless of nicotine formulation. The rate would then increase by 5 percent annually starting in 2028.

The bill’s explanatory note identified the large difference between the existing tax rates as a problem in the current system.

“Such disparity has created regulatory loopholes and incentivized tax avoidance, contributing to substantial revenue loss,” the bill’s explanatory note said.

“By adopting a single rate across all vapor product types, the measure eliminates classification ambiguities, enhances compliance, and fosters equitable treatment among industry stakeholders,” it added.

The Philippine E-Cigarette Industry Association (Pecia) likewise supported moving to a single tax rate, proposing to set it at P10 per milliliter.

“We believe a uniform rate removes the incentive for misclassification or misdeclaration, gives BIR and BOC a simpler basis for enforcement and helps keep legitimate products within the legal, regulated, and taxable market,” Pecia President Joey Dulay told the committee.

Dulay cautioned that the level at which the tax is set would be crucial. He warned that imposing a rate that makes legitimate products increasingly uncompetitive could shrink the taxable market, reducing government revenues while making regulation and monitoring more difficult.

“The highest statutory tax rate is not necessarily the highest revenue-producing rate,” Dulay said. “Our position is therefore simple: protect our children. Enforce the law, eliminate the illicit market, and tax the legitimate market at a rate that keeps it inside the tax system.”

Illicit sales, health concerns

Questions during the hearing also turned to whether members of the legitimate industry could themselves be involved in illicit sales.

Asked whether Pecia members might also be selling illicit products, Dulay said, “In our experience, that doesn’t happen.”

“We represent the compliant industry. Our association is 100% compliant. What we always say is: We have to acknowledge the fact that, in this vapor industry, we have two separate industries. One is the compliant industry. We pay taxes. We follow the law. Two, there is a very large illicit market,” Dulay said.

“We all follow. Our members are strictly prohibited from dealing in illicit products,” he noted.

Dulay also said stronger enforcement should extend to safeguards designed to keep vapor products away from minors.

“We support strict age verification, stronger enforcement against sales to minors, the 100-meter restriction around schools, stronger online controls, and aggressive action against youth-oriented marketing and illegal products. Vapor products are not risk-free, and they must never be sold to minors,” Dulay said.

“So we all really support the health concerns, especially for the youth. RA 11900 has many safeguards to prevent youth uptake. What’s important is proper enforcement,” he stressed.

Operators outside tax system

Meanwhile, Michael Eric Castillo, president and CEO of Caps and Partners Inc., urged policymakers to determine how much of the vape market already operates outside the tax system before deciding how high excise rates should be.

Castillo warned that increasing tax rates does not necessarily promote public health and called on the Department of Finance to establish first an estimate of the illicit vape market.

He said the department could consider methodologies employed by institutions including the United Nations Office on Drugs and Crime, the UN Conference on Trade and Development, the European Union Intellectual Property Office, Global Financial Integrity, and the World Bank.

New Zealand, Malaysia and Canada are examples of markets where products that had previously faced bans were subsequently brought under regulatory frameworks.

He cited as well what he described as a trend in which tax rates and smoking incidence have risen even as government revenues declined.

“This simply indicates tax leakage, illicit substitution, declining legal consumption, and enforcement limitations. You cannot maximize taxation if a substantive portion of the market is not covered by your tax system,” Castillo said. /atm