On Potential Consequences Related to Introduction of Higher Taxes on Tobacco
On Wednesday, 5 October 2016, the Kommersant daily published a number of provisions of the draft of the tax policy main measures in 2017-2019 period developed by the RF Ministry of Finance. According to the information provided by the newspaper, in the draft it is proposed to raise in 2017 the specific component of the excise on cigarettes from Rb 1,420 per 1000 cigarettes which provision is envisaged by the current version of Article 193 of the RF Tax Code to Rb 1,560 per 1000 cigarettes. Also, it is planned to maintain the rate of appreciation of tariffs on cigarettes at the level of 10% in 2018 and 2019, too.
According to our calculations, with the above appreciation of tariffs the weighted average price of a packet of cigarettes may rise from Rb 90 at present to Rb 104 and Rb 115 in 2018 and 2019, respectively.
According to the data of the Euromonitor Int., in 2015 the share of the illegal turnover amounted to 3.1%. Russian experts’ estimates for 2016 are not only substantially below that level, but they also show a decrease. Taking into account the fact that in Russia prices on cigarettes are much lower than in the European Union the current optimistic trend – suggesting that with rates raised as specified in the draft the share of the illegal turnover will not exceed 5% -- can be expected to prevail in the short-term prospect. In such a case, budget revenues from excises on cigarettes may amount to Rb 540bn, Rb 542bn and Rb 548bn in 2017, 2018 and 2019, respectively.
However, a switchover to a pessimistic scenario under which with implementation of the above measures the share of smuggled and pirated cigarettes amounts to 15% in 2019 cannot be excluded. That can be explained by the fact that a lack of harmonization between the rates in the Eurasian Economic Union (EEU) creates incentives for growth in illegal trans-border flows while with a higher gap between the rates of the member-states and a lack of control over equipment in all the EEU member-states those processes may intensify. With the above scenario coming true, the revenues from excises on cigarettes may amount to Rb 500bn in 2017 and decrease in 2018 and 2019 (Rb 499bn and Rb 498bn, respectively).
According to calculations made, even with growth in illegal turnover to 15% by 2019 the declared raising of excises may contribute to reduction of the share of the smoking population from 33% to 25%–23%. So, the above measures are consistent with healthcare goals and permit to increase budget revenues in the short-term prospect though extra revenues are going to be below the expectations of the RF Ministry of Finance: maximum Rb 200bn and Rb 100bn-Rb 80bn in case of the optimistic scenario and pessimistic scenario, respectively. In carrying out the above measures, it is important to monitor illegal market dynamics and take relevant measures if required.
Natalia Kornienko, Head of the Tax System Development Department,
Elisei Leonov. Junior Researcher, Tax System Development Department
On Wednesday, 5 October 2016, the Kommersant daily published a number of provisions of the draft of the tax policy main measures in 2017-2019 period developed by the RF Ministry of Finance. According to the information provided by the newspaper, in the draft it is proposed to raise in 2017 the specific component of the excise on cigarettes from Rb 1,420 per 1000 cigarettes which provision is envisaged by the current version of Article 193 of the RF Tax Code to Rb 1,560 per 1000 cigarettes. Also, it is planned to maintain the rate of appreciation of tariffs on cigarettes at the level of 10% in 2018 and 2019, too.
According to our calculations, with the above appreciation of tariffs the weighted average price of a packet of cigarettes may rise from Rb 90 at present to Rb 104 and Rb 115 in 2018 and 2019, respectively.
According to the data of the Euromonitor Int., in 2015 the share of the illegal turnover amounted to 3.1%. Russian experts’ estimates for 2016 are not only substantially below that level, but they also show a decrease. Taking into account the fact that in Russia prices on cigarettes are much lower than in the European Union the current optimistic trend – suggesting that with rates raised as specified in the draft the share of the illegal turnover will not exceed 5% -- can be expected to prevail in the short-term prospect. In such a case, budget revenues from excises on cigarettes may amount to Rb 540bn, Rb 542bn and Rb 548bn in 2017, 2018 and 2019, respectively.
However, a switchover to a pessimistic scenario under which with implementation of the above measures the share of smuggled and pirated cigarettes amounts to 15% in 2019 cannot be excluded. That can be explained by the fact that a lack of harmonization between the rates in the Eurasian Economic Union (EEU) creates incentives for growth in illegal trans-border flows while with a higher gap between the rates of the member-states and a lack of control over equipment in all the EEU member-states those processes may intensify. With the above scenario coming true, the revenues from excises on cigarettes may amount to Rb 500bn in 2017 and decrease in 2018 and 2019 (Rb 499bn and Rb 498bn, respectively).
According to calculations made, even with growth in illegal turnover to 15% by 2019 the declared raising of excises may contribute to reduction of the share of the smoking population from 33% to 25%–23%. So, the above measures are consistent with healthcare goals and permit to increase budget revenues in the short-term prospect though extra revenues are going to be below the expectations of the RF Ministry of Finance: maximum Rb 200bn and Rb 100bn-Rb 80bn in case of the optimistic scenario and pessimistic scenario, respectively. In carrying out the above measures, it is important to monitor illegal market dynamics and take relevant measures if required.
Natalia Kornienko, Head of the Tax System Development Department,
Elisei Leonov. Junior Researcher, Tax System Development Department