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Raising Tobacco Tax: Good or Bad?

Written by Mariam Papidze, The FINANCIAL

25/08/2013 20:00 (234 Day 13:42 minutes ago)


The FINANCIAL -- The price of tobacco in Georgia will be increased by 25-33 percent from September 2013, according to tobacco importers. The increased taxes on tobacco are aimed at reducing the number of smokers in Georgia, the authorities say. Conversely, industry representatives believe that the new taxes will encourage the development of smuggling in Georgia. “The real aim of their increasing excise tax is the collection of more money for the state budget,” they said.



Excise tax on tobacco will increase in Georgia from 1 September, Georgia’s Finance Minister Nodar Khaduri said. According to him the excise duty on non-filter cigarettes will rise by 5 tetri, and on filter cigarettes - by 15 tetri. Currently, the excise duty on non-filter cigarettes is 15 tetri and on filter cigarettes - 60 tetri.

“Every government has two reasons for increasing excise tax: to collect more money for the budget and to reduce the number of smokers in the country,” said Nikoloz Mchedlishvili, CA&C Director, and Caucasus Corporate Affairs at JTI Caucasus. “Cigarettes are an inelastic product in that a price increase does not reduce customer numbers. Smokers will simply start to buy less expensive cigarettes, which will cause more health problems as a result. This is called trading down,” he added.

“At first, the government intended to raise the excise tax to GEL 2, which would definitely have caused an inflow of cigarettes from Armenia. There was a risk of smuggling activities reappearing like in 2005 when the excise tax was 90 tetri and when 75 percent of the market was illegal. But after our involvement in the issue and explanation of the potentially dangerous outcomes, Nodar Khaduri, the Minister of Finance of Georgia, decided to increase the excise tax by just 5 tetri instead. This amount of money is more or less acceptable. Prices have been increased in Russia as well as in Azerbaijan. What is important now is what Armenia will do in the immediate future. If it does not increase its prices then we will face the danger of the widespread illegal import of cigarettes from Armenia once again,” Mchedlishvili said.

“Increased excise tax is the result of fiscal policy first of all,” said Soso Murgulia, Head of the Marketing Department at Best Tobacco. “It will not reduce the number of smokers. At first they will start buying less expensive cigarettes, but later on they will pay more and switch back to buying their favourite ones again. The price of cigarettes will not increase suddenly. It will increase gradually and after two months the prices will stabilize. I doubt that the products’ final prices will be increased by 20 tetri. Those companies which have lower prices will benefit from the increased excise tax. But for others it will be a problem,” he added.

If the increased excise tax does not reduce the number of smokers, then it means that this new regulation was aimed at increasing the budget’s income and to give the possibility of monopolizing the market, claims Giorgi Khmelidze, representative of the youth wing of the United National Movement. “The final goal of Nodar Khaduri is to monopolize the market. Raising the excise tax is the first step in this direction. His share will be 20-30 tetri per each block of cigarettes, which is no small amount of money. Later he will bring in less expensive, competitive cigarettes to the market meanwhile continuing to occupy the whole market,” declared Khmelidze.

In response to all of these doubts, officials of the Ministry of Finance of Georgia explained that an excise tax increase is consistent with the policy of the Ministry of Labour, Health and Social Affairs of Georgia. “This policy aims to toughen tobacco control in Georgia and reduce the country’s number of smokers. This is why the excise tax is being raised, not due to increasing budget revenues. The budget’s revenue will be increased by just GEL 40 million. As for smuggling activities, all the risks have been well analyzed and work on this direction is continuing,” the officials said.

“The previous government did not implement such regulations as they were actually getting money from the tobacco industry and it was not in their interest to disturb the industry’s income in any way,” said Giorgi Murgulia, Deputy Head of the Tobacco Control Alliance in Georgia. “The amount of money being brought to the budget by the tobacco industry is insignificant compared to the amount of money which is being spent on the treatment and rehabilitation of smokers. An increased price of tobacco will reduce the number of smokers in Georgia as many of the new generation will not be able to afford cigarettes and will therefore not have the opportunity or incentive to start smoking. This is looking at the situation in the long-term perspective. The tobacco industry is not supported in developed countries worldwide so why should it be in Georgia?” he added.

The tobacco industry paid GEL 600 million to the budget in 2012, according to JTI Caucasus. “When the state has a GEL 8 billion budget and the tobacco industry’s share in it is so large, the government should be very careful not to destroy the well-developed system and not to criminalize the business like what happened in 2005. If cigarettes are imported illegally in Georgia, the government and the distribution companies will lose their income. We will not be able to pay as large an amount of money to the budget as we are paying today,” said Nikoloz Mchedlishvili.

In Georgia 11,000 active and 3,000 passive smokers die every year as a result of exposure to tobacco smoke, according to the World Health Organization. 30 percent of the population is tobacco consumers; 55 percent of men and 5 percent of women are smokers. The Welfare Foundation (non-governmental organization) suspects that more women are smokers in Georgia than the report says.

3 billion units of cigarettes were imported in the first 6 months of 2013 in Georgia (with total value of USD 46,000), while almost 6 billion units of cigarettes were imported in 2012 (with total value of USD 90.5 million). The highest amount of cigarettes is imported from Ukraine , Bulgaria and Russia, according to the National Statistics Office of Georgia.

As for the export statistics, 18,000 units of cigarettes were exported in the first 6 months of 2013 (with a total value of USD 1,500) and 39,000 units of cigarettes were exported in 2012 (with a total value of USD 5,100). The highest amount of cigarettes is exported to the United Kingdom, Russia and Ukraine .

The main importers in Georgia are LTD Camel, LTD Philip Morris Georgia, British American Tobacco, LTD B&J, LTD P&L, LTD Best Tobacco, Geo Invest, Georgian Tobacco Manufacturing and others.



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