Ukraine’s cig­a­rette prices and taxes are low, con­tribut­ing to heavy smok­ing and early death

Law­mak­ers are look­ing at rais­ing cig­a­rette taxes by only 20 per­cent – about half the in­fla­tion rate – ef­fec­tively de­creas­ing taxes in a na­tion that still suf­fers from high smok­ing rates and where cig­a­rettes re­main cheap. Im­pos­ing high taxes on cig­a­rettes

Kyiv Post Legal Quarterly - - Contents - By Iso­bel Koshiw ivkoshiw@gmail.com

Ukrainian of­fi­cials ap­pear to be lob­by­ing on the side of the tobacco in­dus­try once again.

On Oct. 5, the Min­istry of Fi­nance pro­posed a 40 per­cent tax in­crease on cig­a­rettes – bring­ing the price in line with in­fla­tion, like any other con­sumer prod­uct.

The par­lia­men­tary tax and cus­toms com­mit­tee, how­ever, has coun­tered the min­istry’s pro­posal, ar­gu­ing for a 20 per­cent in­crease – about half of the of­fi­cial in­fla­tion rate.

In other words, such a small in­crease will ef­fec­tively make Ukraine's cheap cig­a­rettes even cheaper, which spurs smok­ing. Nearly 100,000 peo­ple die pre­ma­turely each year in Ukraine from smok­ing-re­lated diseases.

The sharp cur­rency devaluation – in which the Ukrainian hryv­nia has lost two-thirds of its value in two years – has al­lowed law­mak­ers to pro­mote a tax de­crease as a tax hike.

In 2014, tobacco com­pa­nies paid taxes of Hr 240 per 1,000 cig­a­rettes and in 2015, this rose to Hr 300, ac­cord­ing to a video re­leased by in­dus­try ex­pert Kon­stantin Krasovsky on Dec. 7.

The av­er­age ex­change rate in 2014 was Hr 12/$1; thus far in 2015 it has been Hr 22/$1. This means the tax amounted to $20 per 1,000 cig­a­rettes in 2014 com­pared with $13.6 in 2015.

There­fore, if the in­crease in 2016 is only 20 per­cent, $15.1 will be paid per 1,000 cig­a­rettes at the cur­rent ex­change rate of 23.75; for the 40 per­cent hike, the tax reaches $17.7 – rais­ing the price of a cig­a­rette pack by Hr 5 to Hr 8, or merely $0.21-$0.29.

"As a com­par­i­son, bread has seen a 70 per­cent price in­crease whereas cig­a­rettes have only seen a 20 per­cent price in­crease. There­fore cig­a­rettes have be­come more af­ford­able,” said An­drey Skipal­skyi, pres­i­dent of the Ukrainian Cen­ter for Tobacco Con­trol. “A 40 per­cent (tax in­crease) is al­ready a com­pro­mise and doesn’t in­clude the real price in­crease.”

In his video, Krasovsky ar­gues that if the ex­cise tax in­creases by 40 per­cent, an­nual rev­enues to the state bud­get will in­crease by Hr 7 bil­lion – a fig­ure he based on a 10 per­cent de­cline in the num­ber of smok­ers. But if par­lia­ment de­cides on a 20 per­cent in­crease, the bud­get will re­ceive Hr 4 bil­lion, a fig­ure which re­lies on de­mand re­main­ing the same.

The tobacco in­dus­try is fa­mous for its un­der­handed lob­by­ing tac­tics.

One of the dif­fi­cul­ties for anti-tobacco groups is that there is no def­i­ni­tion of lob­by­ing in Ukrainian law.

“You can’t track the money or the mem­bers of par­lia­ment be­ing paid…so what we do is mon­i­tor their state­ments and if some­one is overtly pro-tobacco we shame them by call­ing them tobacco lob­by­ists,” said Skipal­skyi.

Ac­cord­ing to Skipal­skyi, the tobacco com­pa­nies in Ukraine in re­cent years have fought hard against any in­creases in tax­a­tion. Higher taxes on cig­a­rettes have been proven to be very ef­fec­tive in get­ting smok­ers to quit and pre­vent­ing peo­ple from even start­ing.

Skipal­skyi said the tobacco in­dus­try is on good terms with par­lia­ment's tax com­mit­tee head, Nina Yuzhan­ina, a mem­ber of the Bloc of Pres­i­dent Petro Poroshenko, who de­fends her po­si­tion as "probusi­ness,” ac­cord­ing to Krasovsky and Ro­man Nasirov, her pre­de­ces­sor who is now head of State Fis­cal Ser­vices.

Nasirov has ar­gued against sharp tax in­creases on cig­a­rettes , say­ing they will ex­ac­er­bate Ukraine’s prob­lem with il­licit trade. But anti-tobacco groups ac­cuse Nasirov and other of­fi­cials of us­ing this as an ex­cuse.

“Ev­ery year they keep re­peat­ing the same mantra that it would in­crease il­licit trade…it’s very im­por­tant to sep­a­rate il­licit trade and tax pol­icy. It’s up to the cus­toms of­fi­cials to po­lice il­licit trade on both sides. In Ukraine and in Poland,” said Skipal­skyi.

Like­wise Krasovsky pointed out that the prob­lem with il­licit trade is with cig­a­rettes man­u­fac­tured in Ukraine, not cig­a­rettes com­ing from abroad.

An in­ves­ti­ga­tion con­ducted by in­ves­tiga­tive jour­nal­ist Vlad Lavrov in 2009 as­serted that the cig­a­rette man­u­fac­tur­ers in Ukraine are com­plicit in the il­licit trade - es­ti­mated to be worth $2.1 bil­lion a year. The Re­cently, tax re­form has emerged as the hottest topic of the New Year Eve in Ukraine. De­spite the prin­ci­ple of tax leg­is­la­tion sta­bil­ity laid down in the Tax Code of Ukraine, last year the tax laws were in­tro­duced in Ukraine in the end of the year and be­came ef­fec­tive one week a er adop­tion. To date, gov­ern­ment, in­ter­na­tional donors, and busi­ness ac­tively dis­cuss this year lat­est tax ini­tia­tives in­tro­duced by the Min­istry of Fi­nance of Ukraine and Ukraine’s Par­lia­men­tary Com­mit­tee on Tax and Cus­toms Pol­icy. Mean­while, the pro­po­nents of the mod­er­ate and bal­anced changes sug­gest to con­tinue work­ing on the tax re­form in 2016 and adopt the state bud­get in ac­cor­dance with the ef­fec­tive Tax Code.

in­ves­ti­ga­tion found that man­u­fac­tur­ers pro­duce a 30 bil­lion cig­a­rette sur­plus be­cause of the coun­try’s cheap pro­duc­tion costs, which they then sell to smug­glers at the same price as to a le­gal whole­saler.

Skipal­skyi told the Kyiv Post that only the in­tro­duc­tion of ex­pen­sive track­ing sys­tems would al­low cus­toms of­fi­cials to trace cig­a­rettes back to a par­tic­u­lar fac­tory.

Ja­panese Tobacco In­cor­po­rated, Philip Mor­ris and Bri­tish Amer­i­can Tobacco, three of the four big­gest man­u­fac­tur­ers in Ukraine, said they only sold to li­censed dis­trib­u­tors.

The Ukrainian bud­get has ben­e­fit­ted sig­nif­i­cantly from tax in­creases on cig­a­rettes. Be­tween 2008 and 2015, the tax on cig­a­rettes in­creased al­most 10 times -- from Hr 29 to Hr 300 – and state rev­enue in­creased from Hr 3.6 mil­lion to Hr 18.1 mil­lion.

Be­sides the rev­enue boost, higher cig­a­rette taxes im­prove pub­lic health. As prices rose, ac­cord­ing to Ukrainian State Statis­tic Ser­vice, the num­ber of smok­ers in Ukraine de­creased from 10.1 to 7.7 mil­lion peo­ple.

Fi­nance Min­is­ter Natalie Jaresko agrees. In a state­ment on Dec. 8, Jaresko told re­porters:

“The ques­tion of tax in­creases is painful one. How­ever, from the point of view of the coun­try’s health, I can’t not talk about it, be­cause in ev­ery coun­try ex­cise tax pol­icy is con­sid­ered to­gether with the health pol­icy of the coun­try. Be­cause money from our bud­get also goes to health care,” said Jaresko.

This is a big step ac­cord­ing to Skipal­skyi: “Be­fore Jaresko, I had never heard a min­is­ter view taxes in terms of health ben­e­fits.”

Krasovsky, a vet­eran anti- tobacco ac­tivist, said the gov­ern­ment's po­si­tion is more im­por­tant than that of par­lia­ment com­mit­tees when law­mak­ers vote. Tobacco com­pa­nies are pro­duc­ing more now in an­tic­i­pa­tion that the tax will go up next year, Krasovsky said, so Ukraine's state bud­get won't see ben­e­fits right away.

While Ja­pan Tobacco In­ter­na­tional did not com­ment, Philip Mor­ris and Bri­tish Amer­i­can Tobacco said that tax in­creases should be grad­ual and take con­sumer in­come into ac­count.

A woman shows her pass­port as proof of age at a cig­a­rette kiosk on Dec. 16 in Kyiv. (Anas­ta­sia Vlasova)

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