SMOKE FREE FUTURE: Student volunteers from Tianjin Medical University publicize no-smoking education with the theme of refusing second-hand smoking on May 31, 2009 (LIU XIAOCHUAN)

The figures were released by Zhang Xiulian, spokesman of the State Tobacco Monopoly Bureau (STMB), at a press conference held in Beijing on January 14.

The tax contribution by the tobacco industry to the Chinese fiscal revenue rose 1 percentage point, from 7 percent in 2008 to 8 percent in 2009.

High tax

Increasing the consumption tax on cigarettes is one of the most effective means of tobacco control. And as cigarette prices increase, young people and those in the low-income group may be less likely to start smoking, or at least reduce smoking, to save money.

For this reason, China has levied high taxes on the tobacco industry.

Prior to 1994, the product tax rate on the tobacco industry used to be the same as that imposed on other industries. Then, in 1994 the Chinese Government divided the tobacco industry's product tax into a value-added and consumption tax. Tobacco products have become a major consumption tax item—all cigarette factories have been levied a consumption tax of 40 percent of factory prices.

China adopted a tax measure in 2001 that combined the ad valorem and specific duty method to calculate the payable amount on tobacco products. According to this method, 150 yuan ($21.96) will be levied on every 50,000 cigarettes. Moreover, the government divides cigarettes into two categories—Category A and Category B—and levies different ad valorem taxes on each. Category A refers to the cigarettes whose intra-company transfer prices per 200 cigarettes are more than 50 yuan ($7.32), with a subsequent ad valorem tax rate of 45 percent. Category B refers to cigarettes whose intra-company transfer prices per 200 cigarettes are less than 50 yuan ($7.32) and the ad valorem tax rate is 30 percent.

In June 2009, the government readjusted its consumption tax policies on tobacco products, raising the standard that divides Category A and Category B from 50 yuan to 70 yuan ($10.25) per 200 cigarettes. The ad valorem tax rate for Category A was raised from 45 percent to 56 percent, while Category B's increased from 30 percent to 36 percent.

The high-tax policy has transformed the tobacco industry into a major source of tax revenue in China and a backbone for fiscal revenue for some local governments. Provinces like Yunnan, Hunan and Guizhou are among China's major tobacco planting and processing bases. In 2006, the tobacco industry in Yunnan paid taxes of 39.09 billion yuan ($5.72 billion), accounting for 48.81 percent of the province's total tax revenues. In Hunan, the figures were 20.9 billion yuan ($3.06 billion) and 28.94 percent and in Guizhou, 8.64 billion yuan ($1.27 billion) and 22.96 percent, respectively.

Despite the high-tax policy, the tobacco industry has been able to rapidly expand with more than 60 tobacco companies currently operating in China. Among China's top 500 companies in 2009, nine were from the tobacco industry.

Foreign factors

The tobacco industry is one of the few industries in China not open to foreign investors.

The tobacco industry is a government monopoly in China, overseen by a supreme management entity, STMB, which is tasked with properly restricting tobacco consumption and organizing production and operation of monopolized tobacco products. By the end of 2009, there had been 4.95 million franchised tobacco stores in China.

But exceptions are made to the centralized and unified monopoly system to facilitate smokers' needs. With foreigners arriving to China in increasing numbers in the late 1970s, many could not find foreign brand cigarettes they wanted. To meet the demand of foreign employees, tourists and overseas Chinese, the Chinese Government loosened its control over tobacco products and began to allow, by way of consignment, sales of international cigarette brands in designated domestic shops. At the same time, the country tightened the reins on the inflow of foreign cigarettes into China by issuing import licenses and levying tariffs and product taxes.