OREANDA-NEWS. December 09, 2009. In 2009 the revenue from the tobacco excises are expected at a rate of 107 million leis vs. 192,5 million leis planned for the next year. The government expectations in the current edition of the bill on the budget for 2010 can significantly differ from reality for the worse.

Experts (including foreign ones) ascertain that the increase in the excise tax, proposed in the budget-2010, can lead to reorientation of consumers to cheaper cigarettes, which will benefit neither their health nor the state budget.

This problem was raised the American Chamber of Commerce in Moldova, which members are the four biggest players - international tobacco company British American Tobacco, Japan Tobacco International, Philip Morris and Imperial Tobacco Production Ukraine. Although this issue directly relates to all market participants, including another main player - Chisinau tobacco plant - Tutun CTC.

The site of the American Chamber of Commerce published an open appeal of ATP to the Minister of Finance and the response of the Ministry, which interpret the forthcoming rise in the excise duties. In the result, some nuances that will negate the Government's efforts to reduce overall cigarette consumption to protect public health and increase in revenue to the budget by the increasing the excise tax on cigarettes have appeared. The main problem is - How this increase is made.

Moldovan law defines two types of taxation of tobacco products: 1000 cigarettes: a fixed rate of 6.6 leis and the share from the maximum retail price (MRP) -known to the specialist as the ad valorem part (today - it is 3% of MRP). So, from January 1, 2010, it is expected to increase only the ad valorem part - from 3% up to 12%.

According to the Ministry of Finance, in the context of such increase, the excise duty on one cigarette pack will grow 2-3-fold. Thus the cost of one pack of cigarettes worth 7 leis will increase by 1 leu and the pack of cigarettes worth 16 leis-by 2,2 leis, respectively. So, the share of excise duty in one cigarette pack will not exceed 12-14% as compared to 30-22% in Russia and Ukraine and more than 60% in EU states.

There is a worldwide trend of increasing taxes / excises on tobacco products. Moreover, in Ukraine, Russia and the EU countries minimum excise tax (MET) was introduced. It was introduced following recommendations of the World Bank which state that the fixed part of the tax gives more flexibility and allows governments to raise taxes with the least risk.

In case of changes in the excise duties in Moldova since January 1, 2010, we are likely to observe the "preservation of the low tax base."

It is no secret that purchasing capacity in the country, especially in terms of financial crisis the last year, has decreased (the volume of retail sales – by 6.5%; remittances from abroad – by 33%, the average monthly salary – by 3%, etc). This means that in the context of price increase on tobacco products, the buyer's choice will depend on the price.

At the first glance, it looks logical: the increase in ad valorem rate from 3% up to 12% should proportionally raise prices on the tobacco products. However, the experts predict an entirely different effect - the gap in the price between cheaper and more expensive cigarettes will increase. This, in turn, will re-focus the buyer on the cheaper brands of cigarettes and therefore more expensive cigarettes will be sold in smaller quantities. Thus the budget would not receive additional revenue planned.

In other words, low fixed and high ad valorem component is the tax stimulus for production, import and consumption of products with the low retail price. So, the planned changes to the budget increase the gap between expensive and cheap cigarettes.

The fight against smoking is becoming tougher. The expert studies state that the significant obstacle to consumption is to increase the excise taxes. However, it is necessary to apply the fixed tax burden on each cigarette (regardless of its price segment), because if the person smokes, he thereby damages his health, regardless of the kind of cigarette. Hence one and the same tax measures should be applied to all kinds of cigarettes.

Thus, the projected sharp increase only of ad valorem part of the tobacco products’ taxation will, on the one hand, make the consumers smoke cheaper cigarettes and on the other - will not provide additional revenues to the budget and will further contribute to smuggling of cheap tobacco products from Moldova to EU.

It is interesting, that tobacco companies, as a rule, do not interfere in the state tax policy. They simply accept the annual increase in the excise duties on the tobacco products. Moreover, in current situation they tried to draw the attention of the Ministry of Finance on the consequences of the sharp increase in excise duty only in ad valorem part.

However, due to the "mad" rhythm of work of the Ministry of Finance (preparation of modifications to the budget for 2009 and the draft budget for 2010), the appeal of the tobacco industry was considered as a "complaint" to the sharp increase in the excise duty. As a consequence, the Ministry has responded that the tax burden in the neighboring countries is much higher and that tobacco companies should not complain. At the same time, the Ministry has cited incorrect tax rates in the Ukraine in 2010, and as a consequence, incorrect calculation in respect of the tax burden on cigarettes.

In fact, the practice of neighboring countries and EU shows that to preserve the price balance among different segments of cigarettes, the parallel increase on all types of excise taxes – both on fixed and the ad valorem part is required. In order to ensure increased revenue it would be more logical to introduce minimum excise tax (that is used in Ukraine, Russia and Romania, as well as in most European Union countries (see table).

The uniform increase in excise duties on the two existing components and introduction of the third fiscal position would level the share of cigarettes in all price segments as well as guarantee additional revenues, which would not depend on the brand of tobacco product and would be in direct proportion to the number of cigarettes smoked.