Reduction of ICE to cigarette is not enough to counteract smuggling that amounts to 79% in Ecuador

A reduction in the special consumption tax (ICE) for cigarettes from $0.17 to $0.16 was announced on January 10 by President Guillermo Lasso during a national broadcast. This measure, according to tax and economic experts, can help minimize cigarette smuggling, but it is not enough.

It is that the country has reached alarming levels in the illegal commercialization of this product, which in 2022 was placed at 79% compared to 2014 when it was 5%according to the latest study published by Invamer, an independent firm with 50 years of experience.

This percentage makes Ecuador becomes the second countryafter Panama, with higher incidence of illicit cigarette trade in the region. But it is not the only worrying thing, because within the market eight out of ten cigarettes are sold and consumed illegally. Of these, 64.2% come from the Asian continent.

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Now, if the analysis is deeper, there are provinces like Guayas, Esmeraldas, El Oro, Manabí, Santa Elena and Los Ríos that have an incidence of 90%.

Jorge Calderón, economic analyst, considers that this reduction of $0.01, although it is minimal, is still positive. “As a citizen, put the tax at 1,000% so that people don’t get sick, but as an economist, if you want to reduce smuggling, the tax must be lowered, controls must be strengthened, especially the terrestrial ones”, indicates Calderón.

With these two aspects agrees Max Aguirre, manager of a tax and customs consultancywho to this adds increasing sanctions against smugglers and educating the consumer so that he understands that smoking is harmful to his health.

As part of the study, 1,024 surveys were carried out on men and women, between 19 and 64 years of age. And the 70% of those consulted argued that the main reason for the consumption of contraband cigarettes is due to their low price compared to the legal product.

And that is evident because the illegal marks The most consumed in the country are Carnival and Silver Elephant, from Asia, which have average prices from $2.28 and $1.90, respectively. While the legal cigarettes such as Lark, Leader and Marlboro have an average price of $5.93.

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“It is a set of factors that increase the amount of contraband due to the encouragement given to the difference in the official price versus the price of the smuggled product. We have a formula that encourages smuggling from both sides, from the smuggler and from the consumer,” says Aguirre.

The expert gives the Laffer curve as an example. “Taxes are used to collect and discourage the consumption of something, it has a restrictive effect and we understand that it is detrimental. The Laffer curve tells you that as you raise (the tax) you will collect more, but There comes a point where, no matter how much you continue to raise, your collection will no longer rise because the consumer begins to have other situations, such as opting for contraband. We are at that point. So, increasing taxes is no longer going to increase collection because the consumer is going to stop buying it from the formal side”, explains Aguirre.

The Invamer study also mentions that between 2021 and 2022 the national government stopped collecting more than $270 million each year for evasion of the excise tax on cigarettes as a result of smuggling. And only in 2021 there was a collection of this ICE for $42,326, according to data from the Internal Revenue Service (SRI).

For Calderón, the collection is important in any tax, but since it is special, the objective is to minimize consumption and it is not happening, and it is even dragging contraband. “ICE exists to dismiss the consumption of certain products because they are harmful to the environment, health, among others… Smuggling occurs when there are provisions or very high taxes, here there is no prohibition as suchwhat there is is the tax, so when it goes down, smuggling should decrease, but you have to see the magnitude of the reduction in monetary terms”, points out Calderón, who emphasizes that the value announced by the Government is not adequate.

Because Aguirre points out that a single measure is not structural. “It has to be done as a whole, it was reduced, accompany it with other policies, if not, you will not see the impact. The smuggler also plays and has power because he is faster, he says “I’ll give you credit, discount.” It has to be a strategy to reduce consumption, increase collection and reduce smuggling”, he points out. (YO)