Tobacco

Results of Tobacco Excise Duty: Inflation, Smuggling, and Decreased Consumption

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Photo: Reuters

Increased excise duties on tobacco in Georgia entered into force on January 1, 2017. The value of excise on each pack of cigarettes increased by 0.9 GEL, reaching 1.7 GEL total. Excise duty also increased for fuel.

The increase in excise duty had a significant impact on the economy, which was initially reflected on inflation on tobacco prices and a reduction in tobacco consumption. The introduction of the new taxes has also led to a sharp increase in smuggling.

According to Revenue Service statistics, in 2017, 397 million packs of cigarettes were consumed in Georgia, which is 14.6% less than in 2016.

After increasing the excise tax by 50%, the Government of Georgia was expecting tobacco sales to decrease by 8%. However, the actual reaction was much larger than expected, resulting in an unexpected sales drop of 15%.

In the past four years, excise duty was increased five times on tobacco products.

Increased inflation

The increase in tobacco excise taxes had a negative impact on the economy, specifically on inflation. Tobacco is one of the most purchased good for the Georgian population. Therefore, the tobacco price increase by 0.9-1.1 GEL had a significant effect on the rise of inflation. This has been one of the main reasons why the actual inflation rate (6.5%) exceeded the targeted inflation rate of 2017 (4%). The 2.5 % difference in the inflation rate is caused by the increase of excise taxes on fuel and tobacco.

Increased smuggling

The rise of excise duties directly caused an increase in tobacco product smuggling, according to information given to media outlet BPN by the Investigation Service of Ministry of Finance. In the last year, tobacco smuggling has increased 20 times.

In 2016, the Investigation Service of the Ministry of Finance seized 26,557 packs of cigarettes, and in 2017, 557,685 packs.

Downtrading

Downtrading is the practice of a consumer switching from an expensive brand of cigarettes to a cheaper alternative, mainly because of the high price. This means that the government’s method of preventing the population from smoking increases the health damage caused by smoking, because consumers switch to low-quality cheap tobacco that contains even more harmful chemicals.

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