Tobacco Taxation Policy in Georgia George Bakhturidze, PhD Tobacco Control Alliance in Georgia Associate Professor, University of Georgia 11 Dec 2018, Belgrad

Map of Georgia

Tobacco Taxation in Georgia

Taxation vs Smuggling - During 1998-2003 tobacco tax rate was very low, but illicit cigarettes represented around 70% of the market, because of corruption; - In 2004 the new government made reforms and decreased the level of corruption; illicit cigarettes market share went down to about 10%; Since 2005 tobacco excise tax has been increasing substantially, but the share of illicit cigarettes did not change. - Tobacco tax revenue went up.

Case of the 2005 Tobacco companies had 6 months to prepare for the 2005 tax increase. They pre-purchased tax stamps with the lower 2004 value for release in 2005; The tobacco excise tax revenue in 2005 was 72 million GEL, about 4.4 million GEL less compared to 2004, because the 204 revenue was artificially increased by pre-purchasing the tax stamps; The industry blamed illicit cigarette trade, claiming that the market share of illicit cigarettes went from 10% in 2003 to 65% after the 2005 tax increase. (BAT); A closer analysis reveals that the combined 2004 & 2005 tobacco excise tax revenue was 65% higher (148 million GEL) compared to 2002 & 2003 tobacco excise tax revenue (90 million GEL) in nominal terms, and 47% higher in real terms. Result of tobacco industry tax avoidance (frontloading) and lobbying was tragic – tobacco tax was decreased in May 2006.  

EU and Tobacco Taxation in Georgia In 2014 Georgia signed an association agreement with the European Union; Georgia is obliged to harmonize its tax policy, including tobacco tax policy, with that of the EU; Georgia adopted a mixed tobacco tax system in 2015 by adding an ad valorem component to the excise duty; The base for calculating the ad valorem tax is retail prices set each year by order of the Ministry of Finance; Ad valorem rate in 2015 was 5%, since 2016 – 10%.

Illicit Cigarette Market Share in Georgia  

Tobacco Excise Revenue in Georgia 2002-2017, nominal and real mln GEL

Cigarette affordability

Cigarette affordability in 2017 A quick market observation in September 2017 revealed that the cheapest (non-filtered) cigarettes cost GEL 1.25 per pack (about $0.50); The prevailing price of a non-filtered cigarette pack was GEL 1.30 per (about $0.54); Premium cigarettes were sold for about GEL 4 per pack ($1.65); 25g bag of loose tobacco sold for 3 Gel ($1.2); The sales of excise tax stamps for non-filtered cigarettes doubled in 2017.

Tax avoidance by locals tobacco industry Excise Tax difference between filtered and non-filtered cigarettes is 1.1 Gel ($0.4); Local manufacturers began production of cigarettes with empty heads and with separate filters; Budget lost min. 10 mln Gel ($ 4 mln) in 2017.

Cigarette excise tax rates in Georgia and neighboring countries, 2016-2018, in Gel

Tobacco industry manipulation of data The Investigative Services unit of the Ministry of Finance seized 61,419 and 557,685 packs of illegal cigarettes in 2016 and 2017, respectively; TI said that smuggling increased 9-times, even though the amount seized represents only half day consumption in Georgia; MoF does not suspect any systematic violation of the tobacco excise tax law, except for the situation near the uncontrolled territories (Abkhazia and South Ossetia) and near the border with Armenia; Ministry of Interior Affairs reported only 5 criminal cases related to illicit tobacco trade in 2016 while investigating 7 such cases in 2017; The Border Police of MIA reports no criminal violations during the period of 2013-2017

Prevention of illicit trade Revenue and Customs Service has implemented several measures like: risk analysis and assessment system to select suspicious trucks for inspection (only 2% of cartons, and then 2% of packs are inspected); X-ray scanners at all border crossings and at the postal sorting center; trained dogs that can recognize nicotine; international travelers can bring either 200 cigarettes or 50 cigars or 50 cigarillos or 250 grams of other tobacco products or 10 capsules for e-cigarettes to Georgia tax free as of Jan 2018

Prevention of illicit trade SICPA became operational in March 2013, requires all packs intended for the domestic market to carry a paper-based fiscal stamp with a high level of security features (overt, semi-covert, and covert); These stamps are unique, secure and non-removable; Each stamp contains information stored in a serialized code intended for tracking and tracing and for a data management system; This information includes the name of producer or importer, product name, time and place of production, and volume; The data management system is located at the Georgia Revenue Service and the information sent to the data center is transmitted in near real time; A web application allows domestic producers and importers to order, forecast, pay, and activate the fiscal stamps.

Tax increase advocacy Tobacco Products Taxation Policy - MoH, NCDC, The Union, 2016: One of the Scenarios – 10-year plan and 2% tobacco consumption reduction Year Average price Change in tobacco consumption Total excise Increase in total excise Share of total excise in the price Share of excise and VAT in the price Additional tax revenues from excise and VAT 2014 2.32 -3.2% 0.75 0.12 32.4% 47.6% 46,330,340 2015 2.37 3.3% 1.02 0.27 43.0% 58.2% 153,797,255 2016 2.70 -2.0% 1.21 0.19 44.9% 60.1% 104,089,814 2017 3.15 -2.0% 1.48 0.27 46.9% 62.2% 142,802,434 2018 3.63 -2.0% 1.76 0.28 48.5% 63.8% 146,645,420 2019 4.19 -2.0% 2.11 0.35 50.3% 65.6% 174,517,360 2020 4.83 -2.0% 2.51 0.41 52.0% 67.2% 199,898,409 2021 5.57 -2.0% 2.99 0.48 53.6% 68.9% 228,791,651 2022 6.43 -2.0% 3.54 0.56 55.1% 70.4% 261,670,972 2023 7.42 -2.0% 4.20 0.65 56.6% 71.8% 299,073,338 2024 8.56 -2.0% 4.96 0.76 58.0% 73.2% 341,607,125 2025 9.88 -2.0% 5.86 0.89 59.3% 74.5% 389,961,547

Tax increase advocacy One of the scenarios of the model is based on the target determined by the government decree on Approving the National Strategy for Tobacco Control, which claims that smoking prevalence should decrease by 2% annually. Budget revenue from tobacco excise and VAT will increase on average by 15.9% during the 10-year period. In nominal terms, all collected revenue will constitute around 880 million USD.

The Case Study for Investing in WHO FCTC Implementation in Georgia, 2018 11,400 die every year due to tobacco; One in five of those deaths are due to secondhand smoking; Tobacco costs Georgia around 320 Million USD every year equivalent to 2.43% of GDP; Investments in four FCTC measures (including tax increase) now will save 53,110 lives and avert around 1.4 Billion USD in costs and economic losses by 2023.

E-mail: iayd@yahoo.com Mob: +995 599 174973 Thank you! E-mail: iayd@yahoo.com Mob: +995 599 174973