Government Watch. More Tobacco Tax Will Boost Illegal Consumption

LFMI has examined proposed amendments to the Law on Pollution Tax and formulated its comments and proposals.

The use of funds collected from the excise duty on cigarettes for health care is welcomed but possible without increasing the excise duties.

Earmarking revenue from a particular tax for a specific use is an excellent proposal. This principle is already applied to the revenue generated from fuel excise duties which is partially allocated for the Road Maintenance and Development Programme in Lithuania. This could be the case when it comes to excise duties on tobacco too. However, excise duties could be used for health care purposes without increasing the tariff, a policy that would bring negative consequences.

Higher excise duties on tobacco will boost the consumption of illegal cigarettes.

Counterfeit cigarettes comprise a large share of Lithuania’s tobacco market, 28 per cent according to the latest data.[1] And the main cause is high taxation of tobacco products. Currently, excise duties and VAT constitute as much as 79 per cent (1.95 Euro) of the retail price of an averagely priced packet of cigarettes (2.46 Euro).

Another tax increase will raise the price of an averagely priced packet of cigarettes by 8 per cent and will widen the gap between the prices of legal and illegal cigarettes, a major source of profit from tobacco smuggling. This will further augment incentives to purchase illegal goods.

For these reasons the proposed amendments to the Law on Pollution Tax should be declined.

[1] Nielsen. 2014. Empty Packs Survey Report Lithuania.