The National Association for Tobacco Product Manufacturers (TIRNA) is confused about Finance Ministry’s submitted proposals for tax reform that provide for raising excise tax on cigarettes by 11% instead of previously planned 5.5%.
TIRNA believes the submitted proposals are rushed, economically unjustified and will not secure the economy any major tax income.
“Exactly the opposite – experience shows that increased end prices on tobacco goods only serve to increase smuggling activities, which then causes a decline for state budget income from VAT and bring to naught the work put into by law enforcement authorities in combating smugglers,” representatives of the association explain.
Latvia has the highest cigarette smuggling activity in the European Union. Because of that, the state budget loses approximately EUR 69 million every year, TIRNA informs.
Experience from previous years shows that rapid increase of excise tax on cigarettes only means an equally rapid rise of smuggling activities. As a result, Finance Ministry’s intended effect will not be achieved, and the state will be forced to spend more money combating illegal trade. The government is already unable to collect the previously planned income from tobacco (excise tax collection in the first half year of 2016 was behind the plan by 6%). A more rapid rise of excise tax would give the opposite effect than what the government wants.
TIRNA said multiple times in the past that a rapid or excessive tax increase ahead of inflation would only benefit illegal trade, distort legal entrepreneurship and create losses for the country.
At the same time, the association also reports that cigarette smuggling volumes in the country continue gradually declining. TIRNA reminds that the rise of smuggling activity in Latvia began after excise tax for cigarettes was unreasonably rapidly increased without considering risks in 2008.
It should be noted that the legal market was cut by nearly half as a result, and losses for the state budget were close to EUR 90 million.
TIRNA asks the Saeima Budget and Finance Committee not to support Finance Ministry’s prepared proposals for the tax reform. (BNN/Business World Magazine)
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