Magicians of Lublin

Source from:  From Warsaw Business Journal 06/10/2004

The tobacco industry is gearing up for a price war, even as it is still smarting from a series of excise tax increases. More senseless tax policies bleed the budget of millions "The industry has been thrown into confusion," says Jerzy Skiba, director of the tobacco industry's National Marketing Authority, smoldering at the government for breaking an agreed schedule of aligning excise tax rates with EU required levels by 2009. The government had committed to no rate increases until 2005 after the tax was raised in January this year, but three months later it hiked them up again, this time by nearly five percent. These kind of unscheduled actions on the part of the government, say both growers and producers, make it impossible for the industry to plan. But the government's meaningless promises are not the only problem. The finance ministry's policy is blatantly weighted in favor of one company, Lubelskie Zak?ady Tytoniu (LZT), which just so happens to be state-owned. Successive revisions to excise taxes set by the government have clearly favored roll-your-own (RYO) producers, which until recently accounted for less than two percent of total sales. Favorable rates for RYO producers last year raised their market share dramatically to eight percent. And since state-owned LZT has a near monopoly on the tiny market for RYO cigarettes, it's hardly surprising that many in the industry suspected foul play. [img border=0 hspace="4" vspace="4" align="left" src=http://www.tobaccochina.com/english/picture/showImage.jpg] Since EU regulations require that the same system of taxation apply for RYO as for packet cigarettes, the original plan put forward by parliament in December had proposed a significant but equal rise in the rates for both packet cigarettes and RYO tobacco. A percentage rate, calculated from a brand's maximum retail price (MRP) of 50 percent was to apply to both groups, while a fixed rate of z?.120 per 1,000 cigarettes was to be matched by a fixed rate of z?.120 per kilo of loose tobacco. When this bill reached the Senate, however, it was revised almost beyond recognition by a small group of senators, several of which, press investigations revealed, turned out to have strong links to the Lublin region. This group managed to push through an amended bill on January 16 that not only maintained taxes at 2003 levels of 36 percent of MPR for RYO, but introduced no quota rate at all. "We're talking about indirect taxes, remember," says Pawe? Ba?, deputy government relations manager at Phillip Morris Polska, "which are not intended to favor a certain group of products, but to secure budget incomes." And it's not just cigarette producers, but also tobacco growers who are up in arms as the new legislation will further shrink their margins, they say. "Tobacco for rolling is cheap, poor quality tobacco, whereas our members have, over the last 10 years, invested millions of dollars, mostly funded by bank credit," says Przemys?aw Noworyta, president of the Polish Tobacco Growers Association, which represents 75 percent of local tobacco farmers. "Discrimination in favor of RYO means that we can't get a realistic price for our tobacco." The new taxes introduced in May bowed to both press uproar and EU regulations by introducing a fixed rate (z?.42 per kilo) for RYO tobacco as well as a - now lower - MPR rate of 17.5 percent. The total tax on RYO is still 35 percent lower than the tax on cigarettes, though. And the market share of RYO tobacco has now, in just three months since January, already grown by 25 percent. No management level officials at the excise tax department were available for comment, but Jacek Arciszewski, a finance ministry official, did say, "We don't see any kind of discrimination," and later went on to admit that there were differences in taxation levels but said he was not authorized to comment on the why's and wherefore's. Meanwhile, excise on cigars and pipe tobacco was, in May, fixed at an MPR rate of 50 percent with no fixed quota rate at all, while rumors abound that RYO producers may already be taking advantage of this situation by labeling tobacco as pipe tobacco. At the same time, since budget returns on RYO are considerably less than returns on packet cigarettes, the current situation will deprive the government of around z?.500 million this year. Indeed, the budget looks set to lose still more through the absence of any minimum excise rate for 'ad valorum' taxes, which are calculated as a proportion of a particular brand's MRP. Most EU members that have a high ad valorum rate also have a minimum excise level, calculated from the price of the most popular category, to ensure the stability of the market and therefore budget incomes. But not this member. As well as losing potential tax on RYO then, the budget will also get less from packet cigarette producers. Though most producers notched up their prices to reflect the new tax rise, not all followed suit. Which means that a new price war looks likely to begin. Because the lack of a minimum rate tends to drive down packet prices in the short run, it's an easy policy to justify on a demagogic level. But in the long run, driving down prices will both destabilize the market and bring diminishing returns for the state's coffers, forcing the government to no doubt raise excise rates again. Enditem