Free spirits: alcohol industry enjoys tax-reliefs

By Timothy Sifert

Local vodka producers could pick up another windfall as industry lobbyists accelerate efforts to halve excise duties on the national spirit, bringing them closer to minimum tax levels set by the European Union.

The industry for the country's traditional elixir has been shaken in recent years both by escalating beer sales and, more worryingly, by the aggravating presence of the nontaxable black market in which foreigners and locals peddle dubious booze - most often on the grounds of Warsaw's Stadion Dziesęciolecia (the Russian Market).

By some estimates, contraband liquor swallows as much as 25 percent of the entire spirits market - not only comprised of vodka. And with national hard alcohol consumption hovering around 30 million cases annually, the illegal market is to be reckoned with.

But recent developments indicate progress in the government's efforts to chip away at the black market. Last October, the state's concern over lost tax revenues to shady alcohol merchants, and the vodka industry's alarm at their own shrinking sales, resulted in the ministry of finance trimming the duty on vodka by 30 percent to €989.40 (zł. 4,400) per hectoliter.

The minimum EU excise duty is €550 (zł. 2,440) per hectoliter of pure alcohol.

That move alone, according to industry professionals, pushed some 10 percent of the illegal merchants to the sidelines, as the legal brands' prices began to converge with rock-bottom illegal prices. And vodka consumers generally prefer the better quality products to bottom-of-the-barrel contraband that has contributed to the country's alarmingly high incidence of alcohol-related deaths.

Politicians were also satisfied with the move, because even though tax margins were lowered they ended up collecting more cash as a result of increased sales of legal booze.

Today, vodka producers are urgently suggesting another excise tax cut.

That's welcome news for Grzegorz Chojnacki, commercial director of the Koneser Vodka Factory in Warsaw. Following October's tax resolution, Chojnacki explained, Koneser sales increased a whopping 400 percent. And based on that precedent, he said sales could grow another 200 percent.

"The tax is very important," Chojnacki said, "because the last change in the law had a very large effect on this factory."

He explained that taxes need to be cut at least to be in line with those of neighboring countries Lithuania, the Czech Republic and Slovakia, where liquor levies are 30 percent-40 percent lower. He also added that he expects the Finance Ministry to come around to the industry's mindset once again.

"It will help us develop more of a market," he noted.

For CEDC, the largest distributor of domestic vodka, further decreases in taxation would be welcome.

"The last change made the market more attractive," said Neil Crook, the company's chief financial officer. "Our value went up significantly."

He estimated that the Nasdaq-traded company's vodka distribution has grown 30 percent, a direct result of the last vodka tax decrease.

But he said he is not sure just what the exact effect would be of another law change.

"Everyone was unsure what would happen the last time," Crook said. Even though he welcomes a new excise tax cut, Crook isn't certain what the exact effect would be on the market.