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The tax man cometh

THE PRICE of smoking is about to go up. The Finance Ministry intends to increase excise taxes on cigarettes, pushing up carton prices by at least 15 percent starting January 2006.

THE PRICE of smoking is about to go up. The Finance Ministry intends to increase excise taxes on cigarettes, pushing up carton prices by at least 15 percent starting January 2006.

The ministry's main reason for raising taxes is to comply with European Union laws. However, the move is expected to bring the state secondary benefits. Tax revenues will increase for one, and higher prices just might induce smokers to limit their intake - or quit entirely - resulting in lower healthcare costs.

Insiders say that higher-priced cigarettes rarely discourage people from smoking. In fact, they say excise tax hikes result in more cross-border cigarette smuggling .

The official Finance Ministry proposal for increased excise taxes on cigarettes estimates that the price for a standard pack of 20 cigarettes should increase by approximately Sk10.60 (28 cents), going from Sk70 (€1.82) to Sk80.60 (€2.10). Assuming cigarette consumption remained steady, higher prices would generate Sk960 million (€25 million) in additional tax revenue for the state.

"The law could impact the business environment of producers, importers and distributors of tobacco products. An increase of excise tax rates on cigarettes could also lead to drops in sales," reads the official Finance Ministry proposal.

The planned price increase is part of the revised Excise Tax Law, which the Finance Ministry has just submitted for interdepartmental review. To become law, the proposal must win the approval of the government and then parliament.

Klára Priecelová, a corporate affairs manager at Imperial Tobacco Slovakia, thinks the price hike is too high and outruns the development of smokers' incomes in Slovakia. The price hike, she says, would burden mainly lower income groups.

"A smoker of a cheaper brand of cigarette will have to pay a relative difference of 26 percent more for a carton. A smoker who can afford a more expensive brand will feel only a 15 percent hike. It means the proposed excise tax increase does not burden all brands equally," Priecelová told The Slovak Spectator.

"Consumers of cheaper brands would switch to the illegal market," she warned.

Priecelová compares the current proposal to one in 2003 that resulted in a dramatic increase of excise taxes. That year, illegal cigarettes represented 40 percent of the market share.

"The Finance Ministry's latest proposal will probably launch what we saw in 2003 and 2004. The growth of the illegal market will cause business losses," Priecelová pointed out.

Currently, better security at border crossings and the availability of cheap cigarettes has significantly lessened the market share of contraband to 20 to 25 percent.

Silvia Balázsiková, the spokesperson for the Customs Directorate of the Slovak Republic, says an increase in cigarette smuggling as a result of higher excise taxes is hypothetical.

"But if such a situation comes true, customs offices are prepared to solve it," Balázsiková told The Slovak Spectator.

She admitted, however, that statistics show that smuggling seems to increase after excise taxes increase.

Imperial Tobacco Slovakia advocates a smaller tax rate increase, one that is proportional to smokers' income, and requests that the proposal affect all cigarette categories equally and fairly.

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