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Cabinet of Ministers accepted a minimum excise tax for cigarettes but the amount of the excise tax is a big fat nothing.

Cabinet of Ministers accepted a minimum excise tax for cigarettes but the amount of the excise tax is a big fat nothing.

 InfoMarket Agency Comments

The mentality of our officials seems to be still far-away from European experience, practices and norms, no matter how hard they try to implement a comprehensive approach in Moldova.

On the one hand, under the flags of the World Health Organization and public appeals for protection of health of the nation in the last few years (especially in 2015) with assistance of the government, then through parliament, the so-called package of tobacco control laws has been pushed through. On the other - the strengthening of the anti-tobacco campaign and raising taxes is not quite efficient because the raise is moving only at the rate of inflation.

When the package of anti-smoking laws held a public debate, all were in agreement (no one objected) that smoking should be restricted in public places and near educational institutions. Differences between lobbyists and economists came down to the fact that the first group demanded absolute inquisition towards smokers, the second group was referring to the freedom of choice of each person, taking into consideration the fact the state of Moldova will not receive taxes from smokers, moreover, those incomes will be received by smugglers, counterfeiters and budgets of neighboring countries, especially non-recognized countries.

Veaceslav Ionita, the chairman of the parliamentary committee on budget and finance during that period of time, tried to explain the law to lobby-doctors that the most effective way to combat smoking, especially among teenagers, is to raise the price of cigarettes and it can be achieved through increase of excise tax for tobacco products. In this case, the cigarettes become less affordable and those decided to continue smoking, well, they have the right to do it but they would bring profit to the state budget at the same time.

Such practice is applied in Europe, every smoker knows the difference between the expensive "prestige" brands of cigarettes and cheap is not as significant as it is in Moldova. In Germany, for example, the cigarettes are between 5 and 7 euros per pack, so the difference between cheap and expensive is 40 %; Moldovan cigarettes are from 7 to 25 lei, the price gap is 300 %.

It seems that anti-smoking package should have adopted and started into its legal rights in 2015, and the officials, despite the change of governments should have been more consistent in their decisions and take advantage of the struggle against smoking by laying in the fiscal policy for 2016 a significant increase in excise tax on tobacco products. On one hand, the administrative control of smokers should lead to a reduction in cigarette consumption, on the other - smokers can hardly quit the habit immediately, which means if the excise tax raised, they will have to pay more for cigarettes and the budget will not suffer much losses due to the raise of prices for cigarettes.

However, the above mentioned has not happened yet. The Cabinet of Paul Philip Ministers approved the fiscal policy for the current year and the government showed softness in respect of tobacco products. It can be figured out using the below data list, for example, filter cigarettes, the main product of tobacco stalls:

 

 

2011

2012

2013

2014

2015

2016
(project)

The fixed part of the excise
(MDL per 1000 units)

10

20

30

75

200

220

Ad valorem part of the excise
(% percentage of  the maximum retail price)

18

24

30

24

18

17

Minimum rate of the excise per 1000 units (MDL)

-

-

-

-

-

250


As you can see, for the first time in Moldova there is a minimum threshold of excise tax. That is a fixed part of the excise duty of 220 lei, plus 17 % of the maximum retail price (ad valorem part of the excise tax) as a result should give the amount of "X", but if the "X" in this calculation is less than 250 lei, there will be implemented excise tax of 250 lei actually.

The introduction of the concept of the minimum excise tax - is a big progress for the Moldovan tax policy. In most European countries, it has long been used, allowing on the one hand provide a guaranteed revenue to the budget, on the other - regulate the prices of tobacco products in such a way that the difference between cheap and expensive brands is minimal.

Step made ​​by Moldova on the introduction of the minimum excise tax, itself is a progressive one, but the amount of the minimum excise tax is 250 lei - completely eliminates this "progress". The cost of a pack of 20 cigarettes (if desired by producer) can be reduced to 6-7 lei, comfortably fitting in the minimum excise tax of 250 lei per 1000 pieces.

In this scenario, there is no need to raise the prices, the introduction of the new rates of excise tax can help producers comfortably sell 6-7 lei per pack, as it is now, and the cheapest cigarettes concentrated in this price segment.

The budget could actually benefit from the stability of the minimum excise tax as well as increase the cost of cigarettes, making them less attractive to consumers (in order to reduce tobacco smoking in the country), the minimum amount of excise duty should be in the region of 350 lei or even more. (The current rate is 17 euros, while 23 of 29 EU countries have the minimum excise duty range from 74 euros (Lithuania) to 75.7 euros (Bulgaria); 87.6 (Romania); up to 290 euros (Ireland); 210 Euro (France); 181.5 (The Netherlands)).

It would obligate cigarette manufacturers to raise the price by at least 1-2 lei, thus ensuring an effective anti-tobacco campaign and additional revenue into the budget.

The fact, that currently more than 50% of the market of Moldova cigarettes is in the price range of 14-15 lei per pack. This retail price is already giving budget 350 lei in the form of excise tax (ad valorem plus a fixed part), that is, today – it is more than the minimum (250 lei) established by government in the fiscal policy for 2016. Meaning, changes in tax policy will not affect the most basic price segment of cigarettes at all. As a result - budget will not receive additional income, or the price of cigarettes does not rise (despite anti-tobacco campaign).

Thus, in order to achieve these two goals the government in every effort shows that it tends to, but it is necessary (considering 50 % of the market) to pay excise tax at the rate of 14-15 lei per pack which would be more than they pay today. That is, setting the minimum excise tax higher than 350 lei, it will give the budget additional 200 million lei and the cost of a pack of cigarettes of the average price segment will grow by 1-2 lei. As a result - the two objectives: guaranteed revenue in the budget and decrease the attractiveness of cigarettes by increasing their retail prices can be achieved.

In addition, Moldova has committed itself in 2025 with the purpose of harmonization of tax legislation to bring the level of the minimum excise tax up to 90 euros per 1000 cigarettes. According to the current exchange rate - it is 1980 lei! The first step is the introduction of the minimum excise duty - done (but at the rate of 250 lei (11.4 euros) which gives no impact). Moldova has 10 years to raise it to the required 90 euros.

On the one hand, Moldova is one of the world’s leaders to tighten the legislation in order to combat smoking (as mentioned above – it is prohibited to smoke almost anywhere), on the other - a very effective mechanism to combat smoking by cigarettes prices increase – never made a use of it.

You may refer to the data list mentioned above: the government of Moldova made some concrete steps to increase the excise tax from 2013, while in parallel developed and implemented anti-smoking package of laws. That is to say, everything was done to reduce smoking and smoking has become unprofitable, not only administrative, but also financially. The current Cabinet has introduced the concept of "minimum excise tax", but its amount is almost no impact on the price of cigarettes.

By the way, the same goes for non-filter cigarettes - a nightmare for a physician. In 2015, the excise tax on them was 50 lei for 1.000 units, and it’s been offered to make it 60 lei in 2016. These cigarettes are more harmful for smokers and for those around them. The government did not reduce their attractiveness for some reason, the excise tax of 60 lei will maintain the cost 5-7 lei per pack. In order to raise the price of a pack of non-filter cigarettes at least for 1 leu, the excise tax on them shall be 100 lei for 1000 pcs. This, again, makes them less attractive and gives the budget revenue increase.

Considering current cigarette consumption in Moldova which is nearly 5 billion pieces per year, the excise tax package offered by the government for 2016 is to maintain revenues at the level of the year 2015 - about 1.5 billion, but in fact, due to tightening administrative struggle with smokers, consumption must be reduced and income as well. If the minimum level of excise tax will be raised from 250 lei at least to 370 lei per 1000 pcs., as well as to increase the excise tax on non- filter cigarettes from 60 lei to 100 lei per 1000 pcs., the budget income may increase by 10-12 % or 200-220 million lei.

The Ministry of Finance, of course, possesses more accurate information, and therefore the most accurate prices regulation can be done. It is necessary to implement the prices policy not only mathematically but also from an administrative point of view. Campaign against smoking should be more consistent, it would be better carry it on not only by administrative methods, as adopted by Parliament, but rather using higher prices for tobacco products which leads to inputs into the budget at the expense of those who are not going to quit smoking. // 16.03.2016 – InfoMarket.

 

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