The Moscow Times

Tobacco Firms Fret Over Tax Changes

Proposed changes on how cigarette tax is calculated unfairly target low-income smokers, cigarette companies are warning.

The State Duma's Budget and Taxes Committee discussed on Tuesday a proposal to change the excise tax. The draft law could to be submitted to the Duma as early as this week.

Possible changes in the excise tax are "unjust" because they favor expensive cigarette producers, said Pascal Sanson, general director of Altadis' Balkanskaya Zvezda cigarette factory, a budget cigarettes producer.

Sanson was speaking at a round table organized by cigarette company Liggett Ducat on Tuesday.

Excise tax on tobacco is currently composed of two parts: a flat charge levied on every 1,000 cigarettes produced and a second charge calculated as a percentage of a cigarette's wholesale price. The Duma is considering an increase in the flat charge and a cap on the charge tied to the cigarette price.

The excise tax on cigarettes raised 23.25 billion rubles ($81 million) last year, according to Tabakprom, an association of tobacco producers.

Research company Business Analytica estimates the country's tobacco market at $6.5 billion.

The legal changes will work against Russian consumers, many of whom cannot pay more for cigarettes, said Ivan Savvidi, vice chairman of the Budget and Taxes Committee.

Savvidi is also general director of Donskoi Tabak, a major cigarette-maker in the Rostov region.

Around 67 percent of the country's smokers buy inexpensive cigarettes, priced at less than 13 rubles (45 cents) per pack, said Galina Aysina, vice chairwoman of Tabakprom, citing Business Analytica figures.

"The people are unable not to smoke," said Igor Moiseyev, general director of Pogarskaya cigarette factory, producer of the budget Prima brand. If passed, the excise tax changes will "impoverish" Russians, he said.

More than 65 percent of men and over 30 percent of women in Russia are addicted smokers, according to the World Health Organization.

Tobacco companies scrambling to tap the lucrative consumer base have clashed over excise taxes since the system was changed in 2003.

Only the number of cigarettes produced, not their price, was considered in the old excise tax system.

"We support the return of the old system," the corporate affairs director of Japan Tobacco International in Russia, Vadim Botsan-Kharchenko, said by telephone.

"It was simpler and more transparent," he said.

Russia's fourth-largest cigarette producer by volume, JTI focuses on up-market brands such as Camel and Winston.

Another supporter of the old system, market leader Philip Morris, which controls over one-quarter of the tobacco market, according to Business Analytica, could not be reached for comment Tuesday.

Zvezda's Sanson said that the prices for budget cigarettes would increase, but the demand for them would remain.

"The black market [for cheap cigarettes] would grow," Sanson said.

By Maria Levitov
The Moscow Times, June 29, 2005