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SIT profits snuffed, cigarette smugglers on a roll

The government's New Year's resolution to hike the consumer tax on tobacco has cut a swathe through the profits of Slovak International Tabak (SIT), Slovakia's sole tobacco producer. Company officials say that the tax has simply led to widespread smuggling instead of filling state budget coffers, and argue that the measure should be rescinded.
SIT announced in mid-April that its sales in the first quarter of 1998 fell to 1,456 million cigarettes, a 19% drop compared to the 1,795 million cigarettes sold in the first three months of 1997. "This is clearly a result of the tax increase, which made our products more expensive than those smuggled," said SIT's Public Relations Director, Jozef Banáš.

The government's New Year's resolution to hike the consumer tax on tobacco has cut a swathe through the profits of Slovak International Tabak (SIT), Slovakia's sole tobacco producer. Company officials say that the tax has simply led to widespread smuggling instead of filling state budget coffers, and argue that the measure should be rescinded.

SIT announced in mid-April that its sales in the first quarter of 1998 fell to 1,456 million cigarettes, a 19% drop compared to the 1,795 million cigarettes sold in the first three months of 1997. "This is clearly a result of the tax increase, which made our products more expensive than those smuggled," said SIT's Public Relations Director, Jozef Banáš.

The tax increase resulted in an average 33-percent rise in the price of cigarettes, Banáš explained, which has allowed smugglers to push SIT's brands out of the cheaper end of the market with higher quality products.

SIT, 100-percent owned by Germany's Reemtsma Zigarettenfabriken Hamburg, produces a wide range of relatively cheap domestic brands, the most popular of which is Mars. "What do you think a smoker would decide to buy, if he had a choice between our short-size Mars for 27 crowns and a pack of smuggled king-size West for 25?," asked Banáš.

As a result of the tax, the company's share on the official Slovak market decreased to around 37% last March, a 10% drop against the year 1997.

Last year, tax-hike supporters in Parliament said they were motivated by concerns for public health irrespective of the consequences for local cigarette sellers. But Banáš, himself a non-smoker, believes the move was misguided. "The danger of cancer has nothing to do with this issue," he said. "If we accept that this is a business like any other, we should treat it like that. With words about public health on our lips, we have allowed the criminalization of our public environment."

Slovak cigarettes have become the most expensive for the local consumer among all post-communist central European countries. "The government has virtually invited smugglers to come to Slovakia," Banáš said.

Banáš claimed that smuggled cigarettes, which enter Slovakia mostly through its border with Ukraine, have flooded eastern Slovakia over the past three months, and can also be found in Bratislava. "There are regions where cigarette-smuggling has become a national sport," he said.

The 1998 state budget expected revenues from the tobacco tax hike to reach 4.9 billion crowns ($141 million), 1.6 billion more than in 1997. However, if the sales trend observed in the first quarter continues throughout the entire year, revenues could fall by 1.7 billion crowns, Banáš argued. "We hope that after these first quarter results, there is some chance that the consumer tax would decrease at least a bit," he added.

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