A new Excise Tax Act was enacted on 18 March 2017 and published in the Royal Gazette on 20 March 2017. The new law will become effective in September 2017 (180 days after publication in the Royal Gazette) and will replace and consolidate the existing excise tax laws, including the Tobacco Act, Liquor Act and the current Excise Tax Act.
What is an Excise Tax?
An excise or excise tax is an inland tax on the sale, or production for sale, of specific goods or a tax on a good produced for sale, or sold, within a country or licenses for specific activities. Excises are distinguished from customs duties, which are taxes on importation. Excise taxes are commonly levied on luxury items and goods or services that carry health or other costs that society, as a whole, must bear. Tobacco, alcohol and gasoline are typically subject to excise taxes because of the social costs they create.
Funds raised through excise taxes may be earmarked to redress specific social costs commonly associated with the product that is subject to an excise tax. Tobacco excise tax revenues, for example, might be spent on government anti-smoking campaigns or to offset the health costs associated with smoking. Funds raised from excise taxes on alcoholic beverages are often earmarked to cover the costs associated with the consumption of alcohol, and therefore, the amount of excise tax on alcoholic beverages generally increases as the percentage of alcohol in a beverage increases. For example, it is impossible for a fermented beverage, such as beer or wine, to have more than 20% alcohol (the yeast used in the fermentation process dies above this level) and fermented beverages are typically taxed at a much lower rate than distilled beverages, such as whiskey and rum, which have much higher levels of alcohol because distillation allows for higher levels of alcohol.
In Thailand, the excise tax under the current Excise Tax Act B.E. 2527 on alcoholic beverages can vary tremendously and is not consistent with international standards for excises taxes. For example, Thai Lao Khao has an alcohol content of about 35% to 40%, but the maximum excise tax that can be imposed on these beverages is only 400 Baht per litre of pure alcohol, or 50% of its value.
By contrast, the average alcohol content of wine is about 9-16%, and the maximum excise tax can be imposed on wine is 2,000 Baht per litre of pure alcohol, or 60% of value.
In other words, the maximum excise tax that can be imposed on wine, which has a much lower alcohol content than Thai Lao Khao, is about 5 times higher than the maximum excise tax that can be imposed on these distilled beverages. Some contend that the current excise system contributes to alcohol problems in Thailand. An op-ed piece in Thailand’s English language The Nation stated that “it is the government excise tax policy that makes wine more expensive than domestically produced whiskey” and suggested that this contributes to alcoholism in Thailand.
How Does the new Excise Act Change the Calculation of Excise Tax
The new Excise Tax will change the base for computing excise tax from (a) the existing ex-factory prices and cost, insurance and freight (CIF) values to (b) something known as the “recommended retail price”.
What is the Recommended Retail Price?
The recommended retail price is defined in the new law as “the recommended retail price that a manufacturer or importer wishes to be the selling price to general consumers.” Sections 17 and 18 of the new law provide further guidance on how this price is determined. Section 17(1) states that the recommended retail price should include the following:
- the production cost;
- a management fee; and
- a standard profit.
The recommended retail price calculated on the basis of these items cannot be lower than the final retail price offered to end-users in normal market conditions (exclusive of VAT). The new law leaves many questions about the calculation of the recommended retail price which will, it is hoped, be covered in the approximately 80 regulations to be issued under the law prior to its effective date. For example, the recommended retail price should vary depending on the region of the country and type of outlet (e.g. prices at high end shopping malls may be different from those at smaller retailers).
Manufacturers and importers will have the opportunity to notify the Excise Department of the recommended retail prices for its goods and services. If, however, their suggested prices are not in line with the market or they fail to notify the Excise Department of the recommended retail prices, the Excise Department will have the power to set the recommended retail price (again, based on procedures to be set out in a future regulation).
The Excise Department is also seeking approval from the Public Sector Development Commission Office to incorporate an office tasked with analysing the recommended retail prices. During the process of this approval, the Excise Department will set up a working group to address this issue.
Calculating The Excise Tax – an Example
One way to consider the impact the new law could have on prices is to consider an example. Unfortunately, the new law does not provide any of its own examples, or how the taxes will differ for particular products under the new law, so manufacturers and importers will have to work through their own examples. In our example we look at the excise tax on a 0.75 litre bottle of imported wine from Australia.
This particular wine consists of 12% alcohol by volume and has a single nationwide recommended retail price of 490 THB (factoring in the costs of production, shipping, distribution, insurance and all other costs to bring the bottle to a retail shelf). For alcoholic beverages, the excise tax calculation consists of two components: a tax based on the recommended retail price and a tax based on the volume of alcohol in the beverage as follows:
The tax based on the recommended retail price is equal to the product of (i) the recommended retail price and (ii) the rate of excise tax on wine (which is 30% under the new act), or 490 THB x .30, which is equal to 147 THB.
The tax based on the volume of alcohol in the beverage is equal to the product of (i) the size of the beverage, (ii) the percentage of alcohol in the beverage and (iii) the excise tax on a litre of alcohol for wine (which is 3,000 THB per litre of alcohol), or 0.75 litres x .12 x 3,000, which is equal to 270 THB.
The new act is not clear on whether the excise tax applied will be the tax based on recommended retail price (147 THB), on the volume of alcohol in the beverage (270 THB), the greater or lesser of the two calculations, or a sum of the two calculations (one of the 80 expected ministerial regulations to be issued under the new act may address this). Under the current excise tax system for alcohol (the Alcohol Act), the excise tax consists of the sum of the two calculations. If the same method of calculation carries over to the new act, then our hypothetical 490 THB bottle of wine would be subject to excise tax of 417 THB.