The Impact of Taxation on Russia's Smoking Habits

CEIC Russia Data Talk: Taxes on Russian tobacco products are expected to increase in the near future. The trend can best be illustrated by the dynamics of taxation and its subsequent impact on the pricing of cigarettes. Presently, the government seeks to increase excise taxes to RUB1,250 per 1,000 cigarettes (plus 9.5% of the market price) by 2015 from the present RUB550 per 1,000 cigarettes (plus 8%) and RUB100 per 1,000 cigarettes (plus 5%) in 2007, which marked the highest volume of cigarette sales in Russia. These changes are introduced as part of a law passed in 2010 prescribing drastic measures for discouraging the purchase and consumption of tobacco products in Russia; similar measures have halved cigarette sales in Australia within two years of their introduction. In the same span of time, from 2007 to 2013, the average retail price of a pack of domestically manufactured cigarettes has grown from RUB9.4 to RUB33.5, while for foreign cigarette brands it has more than doubled from RUB27.5 to RUB56.6. The similarity in the value increase approximately RUB25 for both can be attributed entirely to the excise tax (it results from the percentile part of the excise duty being dependent on the initial price). This can be further extrapolated into the future, as the proposed rate of excise tax growth from 2013 to 2015 will be almost twice as rapid as it was from 2007 to 2012, meaning that we should expect average cigarette prices to reach the RUB70 mark for domestic brands and over RUB100 for foreign ones, if not even higher. The overall impact of these increases on sales can be evaluated by assessing the total excise taxes collected on tobacco products. As the excise rates are usually set annually and remain unchanged throughout the year (with the sole exclusion of 2012, when they were altered halfway through the year), changes in excise revenue collection are often indicative of overall tobacco sales. While the growth in these tax revenues tends to decline marginally at the beginning of each year as increases in the excise rates are introduced, the growth rate of excise tax revenue has remained at approximately 30%-35% for the past few years. The lowest growth recorded 5% year-on-year occurred when the first significant increases began to take effect in 2009, which indicates that sales volume declined with the major price shift. This contrasted with the staggering 40% growth recorded for January 2010 despite an identical, value-wise, increase of the excise tax rates, the tax collection increased significantly. This difference can be partially explained by the slump in 2009 as well as the beginning of a recovery from recession expanding the disposable income available to the population in 2010, but the surge in excise revenue is still too significant to discard altogether. Similar bumps also occurred in the middle of 2012 when the excise rate was corrected mid-year and later at the beginning of 2013, when the years new rates were introduced. Statistically, these years represent a turning point. Prior to 2007, cigarette sales in Russia were steadily rising, but after peaking at 424 billion packs in that year, annual sales steadily diminished to 398 billion in 2008, 371 billion in 2011 and 363 billion in 2012. The accelerated decline can be attributed to the excise tax increase, as its rate of growth had been steadily increasing. However, if any significant conclusions are to be drawn about the efficacy of the policy of economically starving nicotine addicts, it has to be done after 2014, when we can analyse data for sales in 2013 and the subsequent tax collection rate. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. By Ivan Kostin - CEIC Analyst Back to Blog
12th August 2013 The Impact of Taxation on Russia's Smoking Habits

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