Various

The Statement of the Minister of Finance that Adoption of the Draft Law Increasing the Tobacco Excise Tax is an Obligation of Georgia Undertaken 10 Years Ago with EU, is Misleading

3 December, 2014

According to the legislative amendment prepared by the Ministry of Finance, the excise tax on tobacco shall increase starting from 1st January 2015. For one box of filter cigarettes the excise tax shall increase by 0.15 GEL, while on cigarettes without filters by – 0.05 GEL. Apart from this, starting from 1st July 2015 so called "mixed system” will be introduced. According to this mechanism, for filter and non-filter cigarettes (20 pieces) the excise tax shall amount sum of the excise tax rate provided under Article 188 of the Tax Code of Georgia and 5% of the sales price of the same goods.

It is notable that in 2013, for on box of local manufactured and imported filter cigarettes the excise tax has increased from 0,6 GEL to 0, 75 GEL, while for non-filter cigarette from 0.15 to 0,2 GEL. As a result of increase in excise tax, the prices of cigarettes have increased as well.

The Finance Minister – Noda Khaduri has connected such legislative amendment with the obligation undertaken with the EU. In particular, he stated that: "In Georgia tobacco is distinguished by low tax rate. We have undertaken an obligation with EU 10 years ago, which provides for approximation of excise tax in Georgia for tobacco to that of applicable in EU. For the next year we plan to increase excise tax rate for tobacco by 0.15 GEL. It is important that this is done in synchronization with neighbors, for Georgia not to become target place for contraband”.

Notwithstanding number of attempts, the Ministry of Finance could not explain which Agreement concluded 10 years ago Mr. Khaduri had in mind. At the same time, according to the representatives of the Ministry of Finance, the increase of excise tax on tobacco is provided under the Association Agreement. In particular, according to Article 283 of the Agreement, the parties undertake to strengthen their cooperation and implement harmonization policy with respect to and against frauds related to excise tax. Such cooperation amongst others includes gradual approximation of excise tax rates in the region and in line with the Framework Convention on Tobacco Control of the World Health Organization. For this purpose the parties shall strengthen cooperation in regional context. The 22ndAnnex of the Agreement explains within what dates and which directives shall Georgia fulfil.

The Association Agreement speaks about gradual approximation of the structure of the tobacco excise tax and tax rate within 5 years from the signing of the Association Agreement. While the Directives regarding the increase of excise tax rate are not applicable at present to Georgia. Within 1 year from signing of the Association Agreement, Georgia-EU Council shall put forward excite tax increase schedule which shall be in line with requirements of fight against contraband and need to protect of the tax revenues. Therefore, at present there is not a legal obligation to increase excise tax rate. It is noteworthy, that the section 10 of the Directives issued by the EU Council concerns those countries, which because of particular features of the their local markets have been given an exemption to gradually adopt new regulations until 31 December 2017. Therefore EU does not require from Georgia immediate fulfillment of the obligations and exactly for this purpose provides for 5 year term for harmonization of legislation, while with respect to excise tax provides for preparation of special schedule. The introduction of the so called "mixed system” intends to harmonization legislation of Georgia with that of EU, protect the interests of market players and mitigate tax risks.

The low excise tax rate in the countries of South Caucasus increases the risks of contraband in Georgia. For comparative purposes, the excise tax in Armenia for imported 1000 filter cigarettes is 34 GEL, while for locally manufactured ones – 29 GEL. In Russia the excise tax for 1000 filter cigarettes will be 37 GEL, in Turkey 109 GEL, while according to Azerbaijani tax code all types of cigarettes are taxed with 12.5 % of their average cost. Georgia does not have the lowest excise tax rate in the region – the excise tax for 1000 filter cigarettes is 37,5 GEL; starting from 2015 this shall increase to 45 GEL, while from 1st July as a result of introduction of the so called "mixed system” this price shall be further increased.

It is to be noted that in 2015 the government intends to generate more than 148,4 million GEL, through increase of excise tax, as compared to 2012 revenue.


Lasha Sesiashvili

Sources:

http://ec.europa.eu/taxation_customs/taxation/excise_duties/tobacco_products/legislation/index_en.htm

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:176:0024:0036:EN:PDF

http://commersant.ge/?menuid=87&id=15886&lang=1

http://newposts.ge/?l=G&id=55736-%E1%83%97%E1%83%90%E1%83%9B%E1%83%91%E1%83%90%E1%83%A5%E1%83%9D,%20%E1%83%90%E1%83%A5%E1%83%AA%E1%83%98%E1%83%96%E1%83%98

http://www.mfa.gov.ge/index.php?lang_id=GEO&sec_id=30&info_id=17011

http://www.who.int/fctc/reporting/party_reports/armenia_annex6_taxation.pdf

http://www.aif.ru/dontknows/actual/1382501

http://www.cabc-global.com/pdf/GENERAL-OVERVIEW-OF-TAX-SYSTEM-OF-AZERBAIJAN.pdf

 

[1] 2011 წლის 21 ივნისის საბჭოს 2011/64/EU დირექტივა წარმოებული თამბაქოს აქციზის გადასახადის სტრუქტურისა და განაკვეთების შესახებ.

 

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