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Ukrainian officials appear to be lobbying for tobacco industry to keep taxes low

Ukrainian officials appear to be lobbying on the side of the tobacco industry once again.

On Oct. 5, the Ministry of Finance proposed a 40 percent tax increase on cigarettes – bringing the price in line with inflation, like any other consumer product.

The parliamentary tax and customs committee, however, has countered the ministry’s proposal, arguing for a 20 percent increase – about half of the official inflation rate.

In other words, such a small increase will effectively make Ukraine’s cheap cigarettes even cheaper, which spurs smoking. Nearly 100,000 people die prematurely each year in Ukraine from smoking-related diseases.

The sharp currency devaluation – in which the Ukrainian hryvnia has lost two-thirds of its value in two years – has allowed lawmakers to promote a tax decrease as a tax hike.

In 2014, tobacco companies paid taxes of Hr 240 per 1,000 cigarettes and in 2015, this rose to Hr 300, according to a video released by industry expert Konstantin Krasovsky on Dec. 7.

The average exchange rate in 2014 was Hr 12/$1; thus far in 2015 it has been Hr 22/$1. This means the tax amounted to $20 per 1,000 cigarettes in 2014 compared with $13.6 in 2015.

Therefore, if the increase in 2016 is only 20 percent, $15.1 will be paid per 1,000 cigarettes at the current exchange rate of 23.75; for the 40 percent hike, the tax reaches $17.7 – raising the price of a cigarette pack by Hr 5 to Hr 8, or merely $0.21-$0.29.

Ukraine has some of the cheapest, lowest-taxed cigarettes in Europe, fueling illegal smuggling and contributing to higher smoking rates, poor health and early death.

Ukraine has some of the cheapest, lowest-taxed cigarettes in Europe, fueling illegal smuggling and contributing to higher smoking rates, poor health and early death.

“As a comparison, bread has seen a 70 percent price increase whereas cigarettes have only seen a 20 percent price increase. Therefore cigarettes have become more affordable,” said Andrey Skipalskyi, president of the Ukrainian Center for Tobacco Control. “A 40 percent (tax increase) is already a compromise and doesn’t include the real price increase.”

In his video, Krasovsky argues that if the excise tax increases by 40 percent, annual revenues to the state budget will increase by Hr 7 billion – a figure he based on a 10 percent decline in the number of smokers. But if parliament decides on a 20 percent increase, the budget will receive Hr 4 billion, a figure which relies on demand remaining the same.

The tobacco industry is famous for its underhanded lobbying tactics.

One of the difficulties for anti-tobacco groups is that there is no definition of lobbying in Ukrainian law.

“You can’t track the money or the members of parliament being paid…So what we do is monitor their statements and if someone is overtly pro-tobacco we shame them by calling them tobacco lobbyists,” said Skipalskyi.

According to Skipalskyi, the tobacco companies in Ukraine in recent years have fought hard against any increases in taxation. Higher taxes on cigarettes have been proven to be very effective in getting smokers to quit and preventing people from even starting.

Skipalskyi said the tobacco industry is on good terms with parliament’s tax committee head, Nina Yuzhanina, a member of the Bloc of President Petro Poroshenko, who defends her position as “pro-business,” according to Krasovsky and Roman Nasirov, her predecessor who is now head of State Fiscal Services.

Nasirov has argued against sharp tax increases on cigarettes , saying they will exacerbate Ukraine’s problem with illicit trade. But anti-tobacco groups accuse Nasirov and other officials of using this as an excuse.

“Every year they keep repeating the same mantra that it would increase illicit trade…It’s very important to separate illicit trade and tax policy. It’s up to the customs officials to police illicit trade on both sides. In Ukraine and in Poland,” said Skipalskyi.

Likewise Krasovsky pointed out that the problem with illicit trade is with cigarettes manufactured in Ukraine, not cigarettes coming from abroad.

An investigation conducted by investigative journalist Vlad Lavrov in 2009 asserted that the cigarette manufacturers in Ukraine are complicit in the illicit trade – estimated to be worth $2.1 billion a year. The investigation found that manufacturers produce a 30 billion cigarette surplus because of the country’s cheap production costs, which they then sell to smugglers at the same price as to a legal wholesaler.

Skipalskyi told the Kyiv Post that only the introduction of expensive tracking systems would allow customs officials to trace cigarettes back to a particular factory.

Japanese Tobacco Incorporated, Philip Morris and British American Tobacco, three of the four biggest manufacturers in Ukraine, said they only sold to licensed distributors.

The Ukrainian budget has benefitted significantly from tax increases on cigarettes. Between 2008 and 2015, the tax on cigarettes increased almost 10 times — from Hr 29 to Hr 300 – and state revenue increased from Hr 3.6 million to Hr 18.1 million.

Besides the revenue boost, higher cigarette taxes improve public health. As prices rose, according to Ukrainian State Statistic Service, the number of smokers in Ukraine decreased from 10.1 to 7.7 million people.

Finance Minister Natalie Jaresko agrees. In a statement on Dec. 8, Jaresko told reporters:

“The question of tax increases is painful one. However, from the point of view of the country’s health, I can’t not talk about it, because in every country excise tax policy is considered together with the health policy of the country. Because money from our budget also goes to health care,” said Jaresko.

This is a big step according to Skipalskyi: “Before Jaresko, I had never heard a minister view taxes in terms of health benefits.”

Krasovsky, a veteran anti-tobacco activist, said the government’s position is more important than that of parliament committees when lawmakers vote. Tobacco companies are producing more now in anticipation that the tax will go up next year, Krasovsky said, so Ukraine’s state budget won’t see benefits right away.

While Japan Tobacco International did not comment, Philip Morris and British American Tobacco said that tax increases should be gradual and take consumer income into account.

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