How will the legal and shadow markets react?

Is it right that our state has no interest in smokers’ budgets? No doubt, everybody has a right to choose if one wants to shorten his life with nicotine and also which way to do this and for what price. Still, the state is far from indifferent to smokers, since they, along with alcoholic beverage consumers, make a considerable contribution to its budget. Moreover, this gives officials a chance to make some money.

Five months ago Verkhovna Rada approved a law On Changes to the 2003 Budget, in part, introducing the so-called mixed system for the excise duties on tobacco goods. Starting next year, the state intends to obtain (in the final result from the smokers, since producers will pass this along in prices) 11.50 hryvnias for one thousand filtered cigarettes and five hryvnias for one thousand non-filtered, along with 5% of the cigarettes sales result. At that, the obligatory pension insurance duty — 2.50 hryvnias for a thousand filtered cigarettes and 1.50 for non-filtered — is canceled, with the Pension Fund losing around 200 million hryvnias as a result.

Who else besides pensioners will lose and who will benefit from this law? This question was under discussion at last Tuesday’s round table organized by the Ministry for the Economy and European Integration. The ministry, in the persons of Minister Volodymyr Hranovsky’s advisers, did not conceal the fact that this dispute belongs to the series of discussions held by the Economy Ministry on the shadow market. The dispute proved quite interesting, since among the participants were, along with tobacco manufactures, the Ministry of Finance, Tax Administration, and customs representatives. The only weak spot was the parliament, sending only one deputy, who could only say that smoking is bad and it would be nice to produce quality cigarettes. Obviously, at present Verkhovna Rada has no time to think about tobacco games. However, in general, the discussion has demonstrated, that the problem could be solved by introducing a corresponding clause into the 2002 budget. Otherwise, as a result of levying the new excise, budget takings will considerably shorten (by two billion hryvnias, according to experts’ estimates), with smuggling expensive and quality cigarettes growing and average smoker, including underage ones, switching from expensive cigarettes rising in price to cheaper ones with falling prices that impair their health more.

Tobacco manufacturers’ opinions parted. Small factories, represented by the SOVAT Association, producing relatively cheap non-filtered cigarettes (incidentally, the Economy Ministry representatives even called it a crime that they are cheaper than bread), supported the mixed system, referring to the fact that the EU countries use it. The major producers, receiving essential foreign investment and producing expensive cigarettes, denounced the new system. This is quite understandable. According to the same ministry’s calculations, the additional tax burden will lay on them, while the non-filtered producers will receive excise privileges.

Much controversy was also caused by administrating the ad valorem rate, which lacks both a mechanism and financing, as well as reattaching excise stamps, requiring approximately two million hryvnias. These technical problems were admitted both by the Ministry of Finance and State Tax Administration (incidentally, they also corroborated the forecasts of potential budget losses), who nevertheless called on everyone to stick to the plan. In all honesty, it is rather difficult for an outsider to understand the excise problems, especially when the dispute is held between its payers. SOVAT President Vyacheslav Sokerchak clarified the issue somewhat, stating that the core of the problem is the excise stamp becoming an article of trade, on which certain people make money. One also should not disregard those interested in cigarette smuggling to change its current vector (from Ukraine) to the habitual one (into Ukraine). Seemingly, by perfecting the cigarettes excise, Ukrainian officials have invented a new and quite profitable rent for themselves.