Friday, November 14, 2014

Illegal cigarettes have grown to almost 40 percent of the entire market

Tobacco shop
 Today’s deep-discounted price points for cigarettes are already being addressed by the adoption of fiscal measures such as tax stamps, where tax paid stamps would be applied to every pack for sale in the European Union.

The Bureau of Internal Revenue is also looking at other measures such as installing CCTV cameras inside the factories to monitor the process of stamp application and cigarette withdrawals to prevent leakages.

The impact of these measures on tax administration should first be evaluated before implementing minimum selling prices.

The imposition of minimum selling prices on cigarettes does not address the principal issue of tax evasion, but merely its symptom which is very low price points of cigarettes in the market.

If today a handful of cigarette manufacturers are not being monitored closely enough to prevent leakages, how could it be possible for enforcement to cover more than 700,000 stores nationwide that sell cigarettes?

Also the idea to give powers to other agencies such as the national police to enforce is a real concern, as corrupt elements in the force could use it as a way to extort funds from small business people, under threat of fines or arrest.

Minimum selling prices would only aggravate low prices since tax evaders would merely continue selling illicit cigarettes to the trade at very low prices, whereas compliant taxpayers would abide with mandated minimum selling prices. This distorts the business environment even more.

With minimum selling prices, overall consumption of cigarettes will not diminish and government’s revenues would suffer also as consumption shifts in favor of illicit products.

People would still be able to get their cheap cigarettes nationwide, except that these products would be illicit versions that do not pay tax.

If there is strict enforcement of the new tax stamps, at every factory, and on every cigarette making machine, then errant manufacturers will no longer be able to subsidize their legal sales with illegal non tax-paid production.

Market forces will then ensure that prices rise at the retail level as manufacturers are forced to recoup their cost to them of the taxes per pack they are no longer able to evade at their factory site.

It should also be noted that internationally. minimum prices have been found to be illegal, or at the very least ineffective.

The European Union, in a decision in 2010, banned the setting of a minimum price for cigarettes in Austria, Ireland, and France. The EU said such undermined the freedom of manufacturers and importers to determine the maximum retail selling price of their products and, correspondingly, free competition.

Further, the EU stated that fiscal legislation is an important and effective instrument for discouraging consumption of tobacco products.  Therefore, for the protection of public health, the objective of ensuring that a high price level is fixed for those products may adequately be attained by increased taxation, with the excise duty increase, sooner or later, being reflected in an increase in the retail selling price.

European Union has set a minimum price for cigarette sales since 2010. However since that time illicit cigarette sales have flourished by selling below this, legal price barrier.   Today, surveys indicate that illegal cigarettes have grown to almost 40 percent of the entire market, denying the government billions in lost tax revenue.  This is primarily because there is no sufficient enforcement at retail to monitor and police the law.  The growth of the illicit cigarettes trade has fostered corruption, which has recently seen the arrest of dozens of EU Customs officers who are the subject of accusations regarding illicit cigarette syndicates operating in the country.

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