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Tobacco Companies may Stop Investing if Excise Tax Increases

Ad Valorem Tax on Imported Tobacco Goes into Effect from Today

From 1 July ad valorem tax on imported tobacco goes into effect. Cigarettes price will rise in Georgia the second time in 2015. However, this does not mean that price of cigarettes will rise today as the new tax will apply to the importing products and not the cigarettes already on sale.

The first reason for the increase in prices was the increase in the excise tax on tobacco products, this time – the introduction of ad valorem tax, providing for a 5% tax of each pack of cigarettes. Despite the fact that the law on ad valorem tax was adopted a few months ago, there are still no precise instructions as to how it will be collected, and what importing companies and producers should do.

In particular, it has not been determined what cost will be taxed – the invoice, distribution or retail price. On this basis, the Revenue Service of the Ministry of Finance has developed a specific norm of accrual of ad valorem tax rate in cooperation with representatives of the tobacco business. Nevertheless, they still have claims to the government.

In particular, according to the Head of Corporate and Regulatory Affairs Caucasus & Moldova at Imperial Tobacco Irakli Nadareishvili, representatives of the tobacco business offered the Government the European model of taxation, but the department rejected it and adopted rules, which leave a lot of possibilities for interpretation and misunderstandings. In particular, he notes that in 2016 the tax will be collected at prices in 2015.

“That is, if a packet of cigarettes in 2015 costs GEL 2, then in 2016 we will have to pay 5% of GEL 2, regardless of how much cigarettes would cost in 2016. Perhaps they will be more expensive, and in this case it is profitable for us , but in any case this rule is not very correct, especially since it is not a specific price, but average. To determine the price will not be easy, and the methodology on which the Revenue Service is working now, in any case will be unreliable “- he says.

According to him, the average price will be compiled by adding up the prices of different brands of cigarettes in 5 different cities of the country. Irakli Nadarejshvili is sure that this method of counting contains considerable risks. “Unfair importers can use a variety of schemes, if in 2016 the price of cigarettes, which now cost GEL 2 , increases to GEL 3, they will sold them for GEL 3, but pay tax on GEL 2. It will be possible to produce the same cigarettes, but with a different design, and in the case of price increases continue to pay the minimum. There are many different schemes that can be used in this case, “- he explains.

According to him, the methodology of counting raises questions among local producers of cigarettes. In doing so, the companies offered a more transparent and understandable method of collection of the ad valorem tax on the basis of the approval of a maximum price for cigarettes.