The Messenger, Georgia
March 2 2005
Excise tax weighs down early results of Tax Code
By M. Alkhazashvili
Georgia’s new tax code entered force in January, making months of
theoretical discussion, debates and disputes a matter of the past and
placing all eyes on the code’s work in practice.
And as reported in the Georgian media, the government is facing
serious trouble. Over the course of a month state revenues decreased
by GEL 15 million and cases of smuggling dramatically increased;
dynamics that are linked to the major rise in excise taxes.
While the tax code won support for its flat tax, elimination of all
but 8 taxes and new dispute-resolution methods, it is now coming
under criticism for the excise tax hikes, including an increase to 90
tetri from 40 tetri per pack of imported cigarettes.
Officials saw this as one easy way to maintain revenues while cutting
other taxes but, as the recent measures against cigarette sales in
Georgia’s many open markets show, officials are struggling to limit
the surge of smuggled goods.
It is obvious that a vital step in increasing revenues by increasing
the excise tax is the eradication of smuggling. But to stop smuggling
is always difficult in Georgia because the country’s borders are not
protected well enough. The post-Rose Revolution government considers
the eradication of smuggling to be one of its major priorities but
raising the excise only makes its fight harder.
When the excise tax is 70 tetri for Georgian made cigarettes and at
the same time smuggled tobacco products from Russia cost 50 tetri, it
is clear that there is now more to be gained from smuggling.
Contraband goods chiefly come from separatist regions, as well as
from Armenia and Azerbaijan. Meanwhile local tobacco producers face a
drop in sales because their legal products are now more expensive.
Since the government found itself facing a rising tide of smuggled
goods, three ministries, the Ministry of Economy, the Ministry of
Finance and the Ministry of Health, agreed to go after the likely
distribution points for cigarettes. Thus they banned all small
traders from selling tobacco products in open air markets and
required a new licensing system for sellers in shops.
Government representatives say the decision, which took effect on
March 1, is correct. “It is outside of the law when on every street
and on every crossroad tobacco products are sold,” the vice-speaker
of Parliament Mikheil Machavariani said on Monday. But others think
that it is pointless to fight against small traders since they are
not the ones bringing in the smuggled goods.
Opposition leaders are attacking the new ban as another example of
the government’s painful policies. “In this decision, as in other
decisions made by the government, the social issues have not been
considered. Social problems are not mentioned in the new Tax Code,”
Conservative Party MP Kakha Kukava tells the newspaper Akhali Taoba.
“This badly influences the interests of the middle and small
entrepreneurs as well. At the same time the excise price increase was
considered only for the importers who have powerful lobbies in the
government,” he goes on the claim.
The sudden implementation of the measure – the government rejected
claims that they announced the new rules only a week ago by saying
they had in fact announced the rules two weeks ago – is one major
defect. Moreover, it will require serious government energies to
police markets and bazrobas, energy that could be also spent
attacking the root of the problem, smugglers busily penetrating
Georgia’s loose borders.
A comparison of excise increases and price increases on selected
cigarettes (source: Anti-Monopoly Service)