Exploring Selective Taxation in Southeast Asia

Exploring Selective Taxation in Southeast Asia is an interim discussion paper that examines how excise taxes are designed and applied across the region, and how tax systems can balance fiscal requirements with broader policy objectives.

Selective taxes, usually in the form of excise taxes, are a policy tool widely used in Southeast Asia. Excise taxes are increasingly presented as both a policy instrument for addressing negative externalities associated with certain products and as a fiscal instrument for generating government revenue. This discussion paper lays out the argument that these two objectives are fundamentally in tension, which has implications for tax design and policy development. 

The Southeast Asia Public Policy Institute has prepared this discussion paper to form the foundation for policy roundtables in four markets in Southeast Asia: the Philippines, Malaysia, Thailand and Vietnam. Drawing on country case studies, these roundtables will explore the design and administration of selective taxes and consider how tax systems can better balance fiscal requirements and broader policy objectives.

Download the full report here. 

Key Findings 

• Economic pressure limits consumer tax tolerance. Excise taxes exist alongside a series of broad-based taxes amid inflationary pressure. The accumulation of both burdens reduces disposable income, weakens purchasing power, and erodes public support for tax policy. Repeated rate increases can create a perception of unfairness potentially encouraging consumers to seek untaxed or illicit markets. 

• The tax base should be tied to the proposed source of harm. Taxes tied to a proposed source of harm (i.e., sugar content, pure ethanol, or carbon emissions) target negative externalities more directly than price-based (ad-valorem) taxes. They are also simpler to administer and treat similar products neutrally. Notably, the WHO and World Bank both favor specific excise taxes over ad valorem taxes for public health policy-focused excise tax design. 

• Excise in the form of ‘health taxes’ poorly targets problematic behavior. Excise taxes apply the same tax rate to every unit of a product category sold, regardless of who buys it. In some cases, such as alcohol, a small share of heavy users is responsible for a disproportionate share of harmful consumption. Yet tax paid rises in proportion to consumption, while the potential for harm rises sharply with heavier use. In this scenario, moderate drinkers that impose little to no societal cost bear much of the tax burden, while it may have limited impact on heavy drinkers. 

• Behavior and substitution can nullify non-revenue policy objectives. Taxes that are too narrowly designed (e.g. focusing on a single sub-category of products) risk shifting consumption toward untaxed, cheaper, or illicit products. This can exacerbate the risk of harm. Thailand’s sugar-sweetened beverage tax is an example. It prompted beverage manufacturers to reformulate, but sugar consumption remains well above WHO-recommended levels, and sugar-containing products remain outside the tax’s scope. 

• High tax rates can exacerbate illicit trade. Increases in the prices of legal products may drive consumers to unregulated and illicit markets, increasingly via e-commerce and social commerce. Unrecorded products can account for up to half of all consumption of excisable products in some markets. In addition to increasing consumption from illicit markets, illicit products may have higher potency and are likely lower quality. 

• ‘Earmarking’ of excise tax revenues requires careful policy design and strict oversight. Some revenue from excise taxation is ‘earmarked’ to fund specific activities or institutions. Earmarking is most effective when it functions as a user fee or directly mitigates the harms associated with the taxed activity. In addition, without robust transparency, monitoring, and accountability, earmarked programs may be vulnerable to inefficiencies or misallocation. In the Philippines’ Sin Tax Reform, a key concern is that government programs could become reliant on revenues from products whose consumption the policy is designed to reduce. This challenge becomes more pronounced when revenues from a narrow, shrinking tax base are used to fund broad, loosely defined, or unrelated programs. 

Guiding Principles for Policymakers 

1. Set excise tax rates at sustainable levels that do not incentivize illicit trade or substitution with illicit products, which would counter the intended policy objectives. 

2. Target a tax base that best helps achieve policy outcomes, such as sugar, pure ethanol by weight/volume or carbon emissions, rather than price (ad valorem). 

3. Limit earmarking to expenditure programs that are appropriately paired with the tax, and ensure a high level of transparency, accountability and monitoring. 

Download the full report here. 

About the Southeast Asia Public Policy Institute

The Southeast Asia Public Policy Institute is a research institute based in Bangkok and Singapore, working across the region. The Institute’s mission is to support the development of solutions to the most pressing public policy challenges facing Southeast Asia in the 21st century. The Institute works on a range of issues across sustainability, technology, public health, trade, and governance. It convenes dialogues with stakeholders and decision makers to drive discussion on the challenges and opportunities facing markets in the region. The Institute draws on a network of in-market researchers, advisors, and partners to provide insights and recommendations for governments, policymakers, and businesses.