Economic Policy Review ISSN 1313 - 0544

IME Analysis: “Excise Taxation of Tobacco Products in Bulgaria – Review and Recommendations”

05.12.2013
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REVIEW AND ANALYSIS OF EXCISE TAXATION OF TOBACCO PRODUCTS IN BULGARIA IN THE 2007 – 2013 PERIOD AND RECOMMENDATIONS IN VIEW OF ACHIEVING NEW EU REQUIREMENTS BY 2018

 

October 2013

 

The full analysis is available here (in English)

 

After EU accession Bulgaria was faced with the challenge to harmonize its excise policy with regard to tobacco products and to reach the minimum level of excise duties on tobacco products, as laid down in the respective EU Directive, until the beginning of 2010. In 2007 prices of cigarettes in Bulgaria (weighted average price) were actually lower than the nominal requirement for minimum excise duty in the EU (64 euro per 1000 cigarettes), which illustrates the tough task that our country faced. More specifically, Bulgaria was set to increase excise duties, respectively prices substantially, without distorting the market and avoiding any negative effects for the budget.

Bulgaria failed to develop a long-term strategy and to adopt a timetable for a smooth increase of excise duties on tobacco products, as all changes were made on a case-by-case basis during the regular budget debate at the end of each year. This led to sudden and sharp moves in fiscal policy. Only in 2010 the excise yield, which is the nominal excise burden on cigarettes, increased by 50%, leading to a drastic increase in prices – in 2009 a pack of cigarettes in the most popular price category cost less than BGN 3, while in 2010 the same pack was already sold for more than BGN 4.

 

Graph: Price (WAP) of cigarettes and volume of legally sold cigarettes

Source: Excise Duty Tables (2007-2013), European Commission & Ministry of Finance, Bulgaria

 

The effects arising from the lack of predictability, inconsistency and the sharp increase of excise duties in 2010 were catastrophic – the legal market crashed by 1/3, government revenues declined, and illicit trade boomed. Note that in 2010 one of every three cigarettes smoked was non-domestic – meaning that the volume of illicit trade doubled in comparison to previous years. The EU experience shows that while there is a general tendency towards increasing excise duties on tobacco products, such a boom in illicit trade is seen only in countries, which are implementing sudden and sharp increases in excise duties, while those that manage to have predictable and consistent policy succeed in limiting the negative effects.

 

Graph: Non-domestic cigarettes market or illicit trade (% of all consumption)

Source: A survey conducted by ACNielsen

 

At present Bulgaria is faced with the challenge to reach the new EU minimum excise duty by 2018 that is equal to 90 euro per 1000 cigarettes. Building up on our own experience and taking into account good practices in other EU countries, Bulgaria shall take decisive measures to minimize the negative effects, arising from hike of excise duties. Above all, a timetable or else called – an excise duty calendar should be adopted in the legislation (similarly to Romania’s practice), where all the steps for future hikes in the excise duty on tobacco products by 2018 will be clearly written in advance. Such a calendar will ensure predictability not only for companies and consumers, but also for the budget. The excise duty can be raised at equal rates, starting from the next fiscal year, so that there is graduality and illicit trade is limited. We see the increase of the minimum excise duty and the specific component by equal rates for the next five fiscal years, starting in 2014, as the simplest and most preferred option.

Such a policy will also contribute to achieving the overall long-term goal of restricting smoking through tax and price measures, which is in line with EU’s health objectives. At the same time, it will ensure that government revenues gradually increase year on year, illicit trade does not expand and businesses and consumers act in a predictable environment.   

The full analysis is available here (in English)