Банкеръ Weekly

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EXCISE DUTIES - PORTENT OF A BREWING STORM

Bulgarian excise duties are caught by excitement again. In accordance with a schedule determined by the European Union (EU), they will come close to the lowest European levels in the next three years. Along with the duties, the prices of cigarettes, alcohol, fuels, electricity will go up, too... In turn, that will lead to higher prices of all major goods, a higher inflation rate and shrunk consumption.Nobody will allow Bulgaria to become the Europe's offshore zone, declared Milen Velchev, Minister of Finance. The EU tax policy requirements are unappealable and Bulgaria is going to meet them in order to guarantee its future membership in the union. These are the rules of the game.The arguments of the Cabinet are iron, but they will not make the average Bulgarian people richer. While duties start measuring themselves with the European ones, local people's income remains an outsider in the competition.Government financiers announced that as the country joins the EU in 2007, electricity and coal will be assessed with excise duties. The EU adopted a directive of the kind a few months ago in order to stimulate the use of renewable energy resources. To reach the minimum European excise duties, Bulgaria (having closed the Tax Policy negotiation chapter) requested three-year transition periods. Should its request be considered, higher duties will be imposed relatively slowly and consumers will accept the price shock easier. The delay requested for electricity is by 2010, for petrol and coal - by 2011, for diesel - by 2013.The Finance Ministry experts forecast that in 2007 the excise duty on electricity for domestic purposes will be BGN0.1 per 100 kilowatthours. In 2008 and 2009, the duty will be growing by BGN0.02, and in 2010 - by BGN0.06. The excise duty on electricity for industrial purposes will be twice lower. Calculations reveal that if in 2007 a household consumes 200 kilowatthours per month, its electricity bill will increase by BGN0.20. Then the excise will be growing every year and in 2010 the monthly electricity bills will be higher by BGN0.40. In 2007, coal for household purposes will be assessed by a BGN3.21 excise duty per ton. In 2008-2010 the rate is forecast to be growing by BGN1.07. Duties on coal used in industry will be twice lower. Therefore, they will amount to BGN1.605 per ton in 2007 and will be BGN0.535 above that level in 2010.Because of the State's obligation to equalize its excise duties with the EU ones, petrol and diesel prices will keep growing after 2007. If we take the current fuel prices for a basis, the tax increase in the price of petrol will be BGN0.19 in the period 2007-2011 and in the price of diesel - BGN0.21. The scheme for the transition period proposed by Bulgaria stipulates that excise duties on diesel and petrol grow by BGN0.055 per litre in 2007 and BGN0.05 in 2008. For the 2009-2011 period, the rate on benzin will be growing by BGN0.025 per litre every year.In fact, because of the amendments to the Excise Duties Act the prices of some goods are expected to grow even in 2005. For example, the price of a 0.7-litre bottle of brandy will increase by BGN0.70, while the price of a bottle of beer - by BGN0.30.Experts in the Ministry of Finance claim that cheaper cigarettes will become more expensive in 2005, whereas the more expensive ones will cost less. According to rough calculations, the price of an Arda pack will jump to BGN1.03 from BGN0.90, while a box of Sredets will cost BGN1.26 instead of BGN1.20. About BGN0.05 will be the reduction in the price of a Victory Lux. A Marlboro box will cost BGN3.60 instead of BGN4.20. However, surprises are possible because of the liberalisation of the market of cigarettes. Producers and importers will begin to determine retail prices by themselves as of 2005. Currently, prices are determined by the State, but from next year the regime will become a registration one, i.e. producers and importers will be the only ones to register in the Ministry of Finance.At first sight, reports show that excise rates will register the most significant growth in 2007. The most serious price challenges regarding fuels, electricity, and coal are expected then, too. However, it is an old Bulgarian tradition that every time they grow expensive all important goods are hiked as well.The possible inflation growth because of the new excise duties has not been calculated so far. In the past three years the assessment of cigarettes and alcohol in Bulgaria has increased by some 50%, and the excise on various petrol brands is up by 20 to 120 per cent. The excise duty on diesel fuel has been raised considerably, too. An excise duty was imposed on gas and even the one on tea was increased. However, the annual inflation for the same period has been in the moderate 5 to 6% zone.The Ministry of Finance may calculate the future inflation pressure caused by the new rates in the 2005 draft budget. However, the effect of the rates may be taken into account indirectly, since they are a major item in the budget revenues. After they were raised in 2004, BGN124MN was expected to enter the treasury. According to the experts of the Institute for Market Economy, revenues may go beyond BGN200MN due to overfulfilment.Minister Velchev is just saying that additional 2005 budget revenues are expected to reach BGN40MN. Should his forecast turn right, rates will not be increased significantly next year. There is only one explanation for that - nobody raises the taxes in a year before elections. At the same time, analyses show that until 2007 the excise duties on various petrol brands should have grown significantly - by 67% for lead petrol, 42% for lead-free one, and 59% for diesel fuel. It is up to the Government to decide how the increase will be carried out. It may be done lightly - for example, by 15 to 20% a year, or at once which will pump up the inflation. Anyway, the increase will not be avoided. As a rule, the excise duty and the value-added tax account for 50% of the end price of petrol. It means that a 10% increase of the excise duty is calculated as a 5% increase in the end price, under equal conditions. The economists from the Institute for Market Economy calculated that a 20% increase of the price of fuels will raise the inflation by 5 or 6% on an annual base. However, their calculations do not include the inevitable increase of the prices of electricity, coal, and natural gas.

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