Банкеръ Weekly


Cigarettes Open BGN500MN Hole in State Budget

Bulgaria has lost several billion levs due to the grey sector of cigarette sales for the past four years. The reason for this is the sharp decline in quantities of cigarettes taxed following the increase in excise duties from early 2010, Deputy Minister of Finance Lyudmila Petkova told the BANKER. Rising cigarette prices following the introduction of new excise taxes and financial difficulties have forced the majority of smokers to turn to the illegally produced or imported cigarettes, she said. According to her, there's the factor "reduced consumption", but its influence is negligible.

The report, which was provided by the Ministry of Finance shows that in 2009 the duty collected 17.6 billion levs from cigarettes and in 2010 - 11.2 billion levs, and the opening of the gap of 6.4 billion pieces is due to the growth of the grey market and reduced consumption. The lost potential revenue for the budget, in case the consumption is maintained compared to 2009 would have provided 930 million levs more revenue for 2010. In the following years the gap has continued to be wide open and potential losses are estimated at over half a billion levs each year, excluding the lost VAT on them, according to Petkova.

According to her, apart from the smuggling of imported cigarettes that harms budget there are also Bulgarian sham exports of cigarettes - they either come back, or actually remain on the territory of Bulgaria, but without excise stickers which means no duties are paid.

If in 2008 the population statistically smoked nearly 22 billion cigarettes in 2012 this figure was 11.5 billion, which automatically means that the difference of 10.5 billion is contraband. This could be a tempting topic for pre-election propaganda.

Bulgaria's Customs Agency sent a special report to the BANKER weekly in this respect. The fact of turning a blind eye to cigarette smuggling actually exists. But the study, based on official and administrative information indicates that a decline in consumption has not happened. On paper the difference is due to the over-hoarding just before the two jumps in the net amount of excise duty which led to a distortion of the real picture as a result. The first took place in the last year of the tripartite coalition and the second one, during the period in office of GERB. The report shows that normal consumption of legal cigarettes in the country annually stays at about 11 billion pieces over the past five years, with slight variations.

What happened actually? In the last year of its mandate (2008) the tripartite coalition decided to raise excise duties sharply to catch up with the EU requirements. The huge jump asked the rate to go from 78.4 levs to 101.6 levs per 1,000 pieces as of early 2009, and as it is normal in psychological terms December 2008 saw a cigarette hysteria. Smokers were stockpiling, but according to observers of their purchasing power, they could buy in advance "cheap" cigarettes for not more than two months. The vast storage of cigarettes at the lower prices did in fact come from the companies. It was rumoured that Finance Minister Dyankov would not strictly monitor the two-month grace period in which the cigarettes with old excise stamps were to be sold and will curtsy the traders with an extended deadline until mid-2009. It turned out that this did not happen. Ardent non-smoker Dyankov did not allow this to happen.

Stocking of cigarettes was huge, because (as absurd as it may sound) this does not hide any risk. Whatever the trader could sell in January and February was the final showdown and what remained had to be withdrawn from the market, destroyed and the state recovered excise duties paid by traders. Official data showed that in 2008 the country paid back a total of 3.4 million levs in duties, but for 2009 it jumped to over 20 million levs - an almost six-fold increase. So the Treasury stimulated players to accumulate huge amounts of cigarettes without taking account of real prospects to sell these quantities.

The big blow to the tobacco retailers however came from Mr. Dyankov. In 2009 he raised faster (almost double than the EU- requirements) the excise rate of 101.5 levs on 1,000 pieces to 141.3 levs per 1,000 pieces. The quick account shows thus about 40% increase in excise duty. This fiscal decision was not demanded by anyone including his own GERB party. What happened then? In December speculators repeated the pattern with over-stockpiling of cigarettes. Vast quantities of cigarettes remained unnecessary at the beginning of March 2010. The state excise returned excise duties coming to approximately 166 million levs, which was eight times more than the previous year.

They burned tonnes of cigarettes in furnaces. The cigarette sales fell from about 17.6 billion pieces to 11.7 billion pieces, measured without the amounts with paid lower excise duties.

And what came out of that? Instead additional 130 million levs that Simeon Dyankov promised to come into the treasury, the state has been losing more than 500 million a year since 2010 and more than one third of the legal cigarette market vanished. Whom actually does this "smart" solution of the GERB's financial genius served? Maybe the friendly smuggling sector?

Over the next two years the average annual rate was not changed and it was a bit over 150 levs per 1,000 pieces. The reimbursement of excise duties in the two years fell to below 2 million levs and there was stable consumption at around 11 billion pieces a year.

Undoubtedly, the most important tool to curb illegal trade, and at the same time to reach the minimum of the European Union excise duty levels is to set a tax calendar for the gradual rise of the total excise duty every year from now on until 2018. The Parliament and the Government pledged to introduce such excise calendar until 2018 when Bulgaria should reach a minimum rate of 90 euros (176 levs) per 1,000 cigarettes. Currently, the excise duty is 148 levs. Instead, in the autumn of last year, the Parliament decided not to increase excise taxes for this year and proposed amendments to the law on excise duties. The budgetary framework set two increases in the minimum component of 148 levs: one increase to 155 levs in 2015 and one to 162 levs per 1,000 cigarettes as of 2016 That in itself is an insufficient step, as there is no certainty as to how the increasing component of excise duties will move in the coming years. Moreover, the later the increase the minimum rate is introduced, the sharper the appreciation of cigarettes will be. Sharp rises lead to increasing illegal market, as happened in 2010.

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