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Imperial Tobacco: Raising Tobacco Excise Tax is Inadequate

An interview with the head of the Imperial Tobacco representation  in the South Caucasus Irakli Nadareishvili

What can you say about the planned increase in excise taxes on tobacco products? Government officials claim that it is  a commitment made in the framework of the Association Agreement with the EU. Is it true?

First of all, I can say that the decision to impose the so-called ad valorem tax on tobacco was a big surprise to us. All obligations with respect to the taxation of tobacco are very clearly spelled out in the Association Agreement.

They can be divided into two parts – the first is the introduction of ad valorem tax, for which Georgia is given a 5-year term. Now, when the Association Agreement is not fully entered into force, the government introduces this new tax which is very different from the excise tax.

But the problem is that in Georgia, neither the state nor the business has experience of working with this tax. Ad valorem tax does not operate  not only in Georgia but also  in neighboring countries. For this reason, 5 years were  given for its preparation.

The second obligation concerns an amount of excise duty, which must be at least 80 Euro per 1 000 cigarettes. In this case, the terms are not specified. At the same time, the agreement with the EU says that the Georgian government should take into account the regional context in determining the amount of excise duty in order to prevent the inflow of smuggled goods.

Speaking of smuggling, last year, when the excise tax increased for the first time, too much has been said about the possibility of an increase in smuggling. What was the  year in this regard? 

Fortunately, this issue is now controlled by the government, and smuggling is not registered, but it can be explained by the fact that, after rising excise taxes, the price of cigarettes in Georgia is higher than in neighboring countries, for example, in Armenia, but not so much that smuggling was profitable.

But if on January 1 the excise further  increases, it will create motivation – the difference between the price in Georgia and Armenia will be so great that smuggling will become profitable.

There is another circumstance – in 2013 the Government adopted a resolution on Tobacco Control, which sets out all the measures to be implemented in the industry.

It specifically states that the excise tax will rise  maximum  once a year, whereas in 2015 it is planned to increase it twice – in January and  July.

The second is  a commitment to develop a plan for monthly growth of excise duty, which would make understandable and predictable position in the market and would help companies in forecasting and development of marketing strategies.

In fact, such a plan has not been developed, and what’s more, at the end of the year a brand new ad valorem tax is  introduced, which is quite unprepared in terms of administration.

Furthermore, why should it be set at 5% in Georgia, whereas in Denmark it is 1%, in  the Netherlands – 2, 36%, in Sweden – 1%?

When an increase of excise tax was planned last year, you met with the Minister of Finance. How things stand now? 

We were ready to join  the work on the law and  the development of the medium-term plan of action.But so far, no one has entered into dialogue with us. We use all available levers, and hope we’ll  be able to convince the government and the parliament that this issue needs a more systematic approach.

The Government states that the aim is not to collect additional taxes but  to reduce the number of smokers. Will this approach be effective?

We have no accurate data on the number of smokers, but we have  sales statistics, which shows 3.2% growth. It certainly cannot be considered as a direct indicator of the number of consumers of cigarettes, but it is clear that the increase in excise duty had no effect on this figure.

Will you have  to rebuild your business if  excise duty increases – for example, to switch to cheaper products?

It is too early to talk about something specific, we still hope to convince the authorities of the fallacy of such a decision.

I can only say that 4 world’s largest manufacturers of tobacco products are operating in Georgia and several hundred people are employed in their representations.

In addition, the tobacco industry accounts for 6.5% of budget revenues.

Therefore, this  topic  is very sensitive, especially if it concerns manipulation of excise. All parties should be interested to do everything slowly, deliberately and consistently in order government, business and consumers stay in the  win.

In your opinion, whether  an increase of excise duties is a mean of additional replenishment of the  budget, which includes  many different social obligations? Though , the government denies fiscal sense of the decision. But increases excise not only on tobacco but also alcohol. Is it really has nothing to do with the budget?

I cannot really say anything about the component parts of the budget, so I’ll  refrain from commenting. But I’ll repeat  once again that the tobacco business is one of the most successful in the country, and we would like to maintain constructive relations between government and business in the future. Otherwise, everyone will lose.