The government is facing the prospect of having to refund more than HK$300 million to the tobacco industry as lawmakers from major parties attempt to veto or slash the 41 per cent increase in cigarette duty introduced in the budget.
As well as being another embarrassment for the administration and Financial Secretary John Tsang Chun-wah, it would also deal a serious blow to public health efforts and leave the city lagging further behind in tobacco control.
Legislators from several major parties, including the Democratic Alliance for the Betterment and Progress of Hong Kong (DAB), the New People's Party and the Liberal Party, are primed to challenge the increase in what one person familiar with the situation described as 'the most uncertain' debate over tobacco duty the government has faced.
A Legislative Council committee studying the Dutiable Commodities (Amendment) Bill, under which the increase was introduced, will meet on April 29, while Legco will have to vote on the bill by late June.
In his budget on February 23, Tsang increased tobacco duty by 50 HK cents per cigarette. But while the move was widely applauded by the public health sector, it has run into stiff opposition from legislators in the run up to several key elections.
Lawmakers from the major parties want the tax increase lowered to between 20 and 25 HK cents per cigarette because they feel the original cut is too heavy for smokers from the grass roots.
If the bill fails to pass through Legco or is amended, the government will be forced into an embarrassing situation of having to give back money to the tobacco industry.
To prevent illegal profiteering, the tobacco tax increase was introduced immediately after the budget, even though the bill technically still needs Legco approval.
The retail price of a packet of cigarettes jumped from HK$39 to HK$50 and the government started to collect the new duty from tobacco firms.
But if the increase was cut to 25 HK cents per cigarette, the retail price would drop to about HK$44 per pack.
Under the law, the government is required to refund the difference to the direct taxpayer - in this case the tobacco importers and distributors.
Although the new duty was passed on to consumers, legally they are not the direct taxpayer and therefore ineligible for a refund. 'What the government is trying to do is clearly in the public's interest. If the bill is not passed, it will be a mockery of our political system,' said the person familiar with the situation.
Based on 2009 figures, the government taxed about 11 million cigarettes per day. This means the possible refund could add up to about HK$330 million if the duty increase is slashed to 25 HK cents per cigarette.
This is the second time the government has faced a revolt over its tobacco tax. In 1991, a proposed 200 per cent increase in tobacco duty was cut by Legco to 100 per cent after the administration struck a deal with lawmakers, narrowly avoiding major embarrassment. The government is unlikely to repeat the 1991 feat when it tabled the bill twice, as agreed with the legislature, first to increase the duty and then to cut it back.
Lee Mer, convenor of the I Smoke Alliance, said a duty increase below HK$4 per pack was acceptable. The group urges the tobacco companies to donate all the tax refunds, if any, to charities or services to help people quit smoking.
Deanna Cheung Kin-wah, chairwoman of an alliance of major tobacco companies called the Tobacco Control Concern Group, said it welcomed any cuts. Asked if the tobacco industry would donate any tax rebate, she said it was a hypothetical situation.
In 1991, a proposed 200 per cent tobacco duty increase was cut by Legco to this much after a deal with lawmakers: 100%