Warsaw, 29th October 2018
The fight again the tobacco grey zone
Smart excise policy, regulatory solutions that tighten tobacco cultivation and drought trading regulations, as well as intensified operations by authorities – these are the factors that made it possible to reduce the grey zone of tobacco products by around a half over the last 3 years – according to the fourth Business Paper of the Union of Entrepreneurs and Employers.
According to common knowledge, the grey economy is a very unfavourable phenomenon for the economy. Particularly vulnerable to fall victim to it are those sectors where non-compliance pays off best and unpaid taxes are highest. One such sector is the tobacco market. High increases in excise tax on cigarettes resulted in the fact that in 2011, excise duty per an average packet of cigarettes amounted to about PLN 6, in 2015 it was already more than PLN 8. The VAT burden also grew along with excise duty increases. Those high tax increases were not accompanied by an increase in budget revenues, which, on the contrary, were decreasing.
“Up until 2015, the government in spite of our clear warnings, stubbornly increased the excise duty on cigarettes, although it was obvious that it would not result in higher revenues,” says Cezary Kaźmierczak, President of the Union of Entrepreneurs and Employers – ZPP. “There was less and less money from tobacco excise, while the grey zone grew unchecked, from 13.9%. in 2011 up to 19% at its height in 2015. This clearly affected the legal cigarette market, which in this period shrunk by a quarter.”
At the same time, no significant legislative initiatives to tighten the system took place. Point measures were carried out, such as the taxation of dried tobacco with excise duty, but they were completely inadequate.
“The legislator’s limited activity definitely contributed to the increase of the informal economy until 2015,” says Marcin Nowacki, Vice-President of the Union of Entrepreneurs and Employers. “One would react to threats in a completely inadequate manner, introducing small, singular changes, limiting the effects of negative phenomena on the market such as, for instance, the once popular “party cigars”, but it was a drop in the ocean of needs. As a result, the grey zone of tobacco for smoking reached the level of up to 60% of the market volume.”
According to the Union’s estimates, in the years 2011-2015, the Polish state budget lost due to the tobacco produce grey zone as much as approximately PLN 25 billion in revenues.
In 2015, however, a significant change in policy took place that went beyond a simple correction. First of all, the excise tax hike was stopped. One ought to make note of the fact that in Poland it exceeds the minimum levels required by the European Union.
“For years, we have been repeating that further increases in excise tax on cigarettes will do no good, and they will even be counterproductive. The authorities eventually took it into due consideration and gave up the nonsensical increases, the result of which was visible almost immediately,” said Cezary Kaźmierczak.
Nevertheless, merely stopping the increases would not bring satisfactory results. It was necessary to take legislative action and this was precisely what happened. A number of duties and regulations were introduced regarding intermediary tobacco operators, excise security, as well as monitoring of both crops and raw tobacco trading. An obligation for all producers of raw tobacco to register themselves in a special registry was introduced.
“It turned out that it was possible to tighten the system in a regular and organized manner,” emphasises Marcin Nowacki. “Moreover, reconnaissance and operational privileges were granted to customs services, which led to the fact that in 2016, five times more illegal cigarette factories were closed down than in 2014.”
The results of the activities carried out, both in terms of excise policy, as well as legislative proposals and changes concerning authorities, are all very positive – the share of informal economy in the cigarette market fell by 6.7 percentage points, while legal market grew by almost 3%, revenues from tobacco excise duty increased by PLN 1 billion a year. Thus, we managed to reverse all negative trends caused by misguided policies of previous years.
Despite the policy’s good results, the threat of the grey zone is still real, as new risks are already on the horizon, such as the ban on the sale of menthol products. Both those products and the recommendations of the Union of Entrepreneurs and Employers in this scope will be discussed in a comprehensive report, the publication of which is planned for November this year.