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Demand for Tobacco Products Grows because of Higher Excise Tax Rate

Over the past 3 years cigarette excise tax rate has doubled, however, tobacco products sales have increased by 14% anyway.

Over the past 3 years, starting from September 1,  2013 excise tax rate on tobacco products, on both filter and non-filter cigarettes grew 4 times. As a result, the sale price of cigarettes has doubled. Despite this fact, higher excise tax rate and higher price on tobacco products have not reduced smoking level in the country.

Tobacco excise tax rate grew at the beginning of 2016. On January 1, 2016 excise tax rate on filter cigarette (20 pieces) increased by 0.20 GEL to 1.10 GEL, while the rate on non-filter cigarette (20 pieces) increased by 0.05 GEL to 0.30 GEL.

Moreover, proportional rate on filter and non-filter cigarettes (20 pieces) rose to 10% from 5%. It should be noted that on September 1, 2015 the so-called mixed system  of cigarette excise tax was introduced in Georgia. Excise tax rate on tobacco products both in quantity and weight is determined in compliance with the retail sales price. According to the so-called mixed system, excise tax rate on filter and non-filter cigarettes will be the sum of the excise tax rate determined by the tax code and the percentage of the retail-sale price of this product determined by the government

The Government raised tobacco excise tax rate on September 1, 2013, for the first time. Excise tax rate on one box of domestic and imported filter cigarettes increased from 60 Tetri to 75 Tetri, while the excise rate on non-filter cigarettes increased to 20 Tetri from 15 Tetri. Since then tobacco products excise tax rate increased three times. At the same time, as noted above, the proportional excise tax rate was introduced in 2015 and the rate marked 5% for one box of cigarettes. In a year this rate doubled to 10%.

As a result, over the past 3 years the excise tax rate on filter cigarettes rose to 1.10 GEL from 60 Tetri, while the excise tax rate on non-filter cigarettes increased to 30 Tetri from 15 Tetri. This signifies the excise tax rate doubled and the new proportional excise tax rate was added to it  that totaled 10%.

The objective of growth in excise tax rate is to tighten tobacco control mechanisms and minimize the smoking level in the country and harmonize the Georgian legislation with European instructions. However, outcomes of excise tax grow suggests that the policy intended for smoking level reduction in the country has brought opposite results.

Regretfully, no annual statistics is carried out on quantity of smokers in Georgia. However, smoking level may be appraised due to the volume of sold cigarettes. Over the past years tobacco products imports have been growing. A little contraction was recorded in 2015 as compared to 2014. According to the 1H16 indicators, Georgia imported 55.5 million USD cigarettes, up 3.5 million USD compared to the same period of 2015. At the same tie, tobacco imports have increased by 15% since 2012 as compared to 2015. This signifies over the past 3 years the excise tax rate doubled. As a result, retail price doubled, but smoking level increased, instead of reduction.

The international experience suggests that growth in cigarette taxes cannot narrow smoking level in the country or this mechanism brings only unimportant effect.

Economists know that cigarette is an irrelevant product in relation to prices and growth in cigarette prices cannot reduce the smoking level, like all other products, and smokers have to buy lower-quality cigarettes.

Therefore, if we have real intention to reduce the smoking level in the country, this process should be carried out through educational, pedagogical policy, like many other countries, not through growth in product prices, even more so we know this mechanism is useless.

Excise tax, like VAT, is an indirect tax and the consumer has to pay it. As a result, ordinary smokers have to cover the increased tax rates.

By Merab Janiashvili
Economic Analyst
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