Nails in the industry coffin? Excise on cigarettes
Yet those in the business say the new tax system would deprive the industry of control over its future, as well as handicapping this country's ability to compete against its EU neighbors. The plans, if passed, will come into force next March.
The proposals have shocked the tobacco industry by allowing for a massive increase in both elements of the current mixed excise tax, while not including more than an option of a minimum tax on cigarettes. Also surprising, say many in the sector, is that the proposals empower the Finance Minister, Andrzej Raczko, to fix excise rates arbitrarily by ordinance each year, without providing guidelines regarding the basis on which annual decisions will be taken.
At present, excise taxes on tobacco provide for a fixed ad valorem rate of 25 percent of the packet price of each cigarette brand sold, calculated on the basis of industry figures regarding the most popular category of cigarettes. Added to this is a specific rate of zł.57 (€12) for every 1000 cigarettes sold. The Parliamentary Finance Committee's new plans, however, would do away with the fixed ad valorem rate, replacing it with a maximum ad valorem rate of 50 percent of the packet price, as well as providing for a maximum specific rate of zł.120 (€26) for every 1000 cigarettes sold. Current domestic ad valorem excise taxes are already higher than in neighboring countries.
"The result will be a price war," says Przemysław Noworyta, head of the Polish Tobacco Growers Association, going onto add, "They should leave the ad valorem rate at 25 percent and increase only the specific rate, which affects everyone equally."
Iwona Sarachman, spokesperson for Poland's biggest tobacco manufacturer, Philip Morris Polska, confirms this analysis. She refutes suggestions that those seeking an increase in the specific rate and a freezing of the ad valorum rate represent the interests of only pricier brands.
"We have cigarette brands in every price range and segment, so as a company we represent the whole spectrum of the industry. All we want is a level playing field."
Another concern is the lack of any built-in minimum ad valorem excise tax, which would mean that even on sales of the cheapest cigarettes, manufacturers would pay an ad valorem tax sum equal to that paid on sales of cigarettes in the 'most popular category.' The lack of a minimum rate, say many in the industry, will handicap Polish producers against cheaper competition from Poland's future EU neighbors, once the borders come down in May.
"Increasing the ad valorem rate without a minimum excise tax is the most disastrous scenario you can imagine from a government income point of view," says Chris Sijstma, President of British American Tobacco Polska, most of whose cigarette brands are in the mid-price range.
According to Iwona Sarachman, most EU countries have a minimum rate which is justified as a necessary mechanism to protect the quality standards of the industry. Przemysław Noworyta supports this view, stating that the lack of this kind of protection will also seriously undermine the significant investments domestic tobacco growers have made to improve the quality of their tobacco over recent years.
The fact that the government's decision provides no guidelines as to how the Minister of Finance will take decisions on fixing the actual rates and empowers the Ministry to make unilateral decisions on tax rates each year, according to Przemysław Noworyta, makes it very difficult for the industry to plan for the future. Excise tax rates have always in the past been calculated in relation to the price of the 'most popular category,' on the basis of industry figures.
"With one variable (the specific rate) it was easier to plan. With two (the specific rate plus the ad valorem rate) it would be very difficult."
The government justifies its plan on the basis of EU requirements that the value of excise taxes in Poland be raised to €64 (zł.299) per 1000 cigarettes by 2008 and that the specific rate be raised to 57 percent of the retail price of the 'most popular category.' The combined present ad valorem and specific rates are worth about €24 (zł.112).
Yet to provide for the doubling of both rates in one year, according to Chris Sijstma, will exacerbate the problem of an already declining market. He supports the opinion of The Tobacco Growers Association, that excise taxes should be calculated so that the price of cigarettes doesn't rise any faster in Poland than in other countries.
"We should take it step by step," says Przemysław Noworyta, "Otherwise the price of Polish tobacco will cease to be competitive in relation to that of our European neighbors, whose taxes are already lower."
As compared to the existing 25 percent in Poland, ad valorem excise taxes on cigarettes in Germany constitute 24.23 percent of the retail price; in the Czech Republic 22 percent; in Lithuania 10 percent; in Latvia 1.8 percent; and in Slovakia 0 percent.
The proposals have shocked the tobacco industry by allowing for a massive increase in both elements of the current mixed excise tax, while not including more than an option of a minimum tax on cigarettes. Also surprising, say many in the sector, is that the proposals empower the Finance Minister, Andrzej Raczko, to fix excise rates arbitrarily by ordinance each year, without providing guidelines regarding the basis on which annual decisions will be taken.
At present, excise taxes on tobacco provide for a fixed ad valorem rate of 25 percent of the packet price of each cigarette brand sold, calculated on the basis of industry figures regarding the most popular category of cigarettes. Added to this is a specific rate of zł.57 (€12) for every 1000 cigarettes sold. The Parliamentary Finance Committee's new plans, however, would do away with the fixed ad valorem rate, replacing it with a maximum ad valorem rate of 50 percent of the packet price, as well as providing for a maximum specific rate of zł.120 (€26) for every 1000 cigarettes sold. Current domestic ad valorem excise taxes are already higher than in neighboring countries.
"The result will be a price war," says Przemysław Noworyta, head of the Polish Tobacco Growers Association, going onto add, "They should leave the ad valorem rate at 25 percent and increase only the specific rate, which affects everyone equally."
Iwona Sarachman, spokesperson for Poland's biggest tobacco manufacturer, Philip Morris Polska, confirms this analysis. She refutes suggestions that those seeking an increase in the specific rate and a freezing of the ad valorum rate represent the interests of only pricier brands.
"We have cigarette brands in every price range and segment, so as a company we represent the whole spectrum of the industry. All we want is a level playing field."
Another concern is the lack of any built-in minimum ad valorem excise tax, which would mean that even on sales of the cheapest cigarettes, manufacturers would pay an ad valorem tax sum equal to that paid on sales of cigarettes in the 'most popular category.' The lack of a minimum rate, say many in the industry, will handicap Polish producers against cheaper competition from Poland's future EU neighbors, once the borders come down in May.
"Increasing the ad valorem rate without a minimum excise tax is the most disastrous scenario you can imagine from a government income point of view," says Chris Sijstma, President of British American Tobacco Polska, most of whose cigarette brands are in the mid-price range.
According to Iwona Sarachman, most EU countries have a minimum rate which is justified as a necessary mechanism to protect the quality standards of the industry. Przemysław Noworyta supports this view, stating that the lack of this kind of protection will also seriously undermine the significant investments domestic tobacco growers have made to improve the quality of their tobacco over recent years.
The fact that the government's decision provides no guidelines as to how the Minister of Finance will take decisions on fixing the actual rates and empowers the Ministry to make unilateral decisions on tax rates each year, according to Przemysław Noworyta, makes it very difficult for the industry to plan for the future. Excise tax rates have always in the past been calculated in relation to the price of the 'most popular category,' on the basis of industry figures.
"With one variable (the specific rate) it was easier to plan. With two (the specific rate plus the ad valorem rate) it would be very difficult."
The government justifies its plan on the basis of EU requirements that the value of excise taxes in Poland be raised to €64 (zł.299) per 1000 cigarettes by 2008 and that the specific rate be raised to 57 percent of the retail price of the 'most popular category.' The combined present ad valorem and specific rates are worth about €24 (zł.112).
Yet to provide for the doubling of both rates in one year, according to Chris Sijstma, will exacerbate the problem of an already declining market. He supports the opinion of The Tobacco Growers Association, that excise taxes should be calculated so that the price of cigarettes doesn't rise any faster in Poland than in other countries.
"We should take it step by step," says Przemysław Noworyta, "Otherwise the price of Polish tobacco will cease to be competitive in relation to that of our European neighbors, whose taxes are already lower."
As compared to the existing 25 percent in Poland, ad valorem excise taxes on cigarettes in Germany constitute 24.23 percent of the retail price; in the Czech Republic 22 percent; in Lithuania 10 percent; in Latvia 1.8 percent; and in Slovakia 0 percent.
