Excise taxes on tobacco of more than 10 KM per kilogram would extinguish the legal tobacco market

If the proposal to tax cut tobacco at a rate of 78 KM per kilogram is accepted, the market for legal cut tobacco will be extinguished overnight. At the same time, such excise policy will give wind to the sails of smugglers and the black market for cut tobacco. This was shown by an analysis conducted for the needs of tobacco producers and processors in BiH, writes the BiH news agency Patria.

However, the analysis further states, this proposal would not only endanger tobacco producers and result in lower state revenues, but its adoption would also extinguish many jobs in industries directly or indirectly related to tobacco production.

During 2013, the retail price of one kilogram of tobacco in BiH was around 70 KM per kilogram. However, in the case of introducing an additional excise tax of 10 KM per kilogram on legal cut tobacco, the retail price of a kilogram of tobacco would increase from 70 to about 93 KM, or by 33%.

Analysts further believe that such an increase in the price of legal cut tobacco would lead to a decrease in the sales of legal tobacco by about 30%. Namely, the retail price of legal cut tobacco would be three times higher than the price of illegal tobacco. In that case, a portion of consumers with extremely low purchasing power would switch to consuming illegal tobacco.

Any increase in excise tax greater than 10 KM per kilogram, this analysis warns, would lead to an increase in the price of legal cut tobacco to over 100 KM per kilogram, or its approximation to the price of cigarettes. This, along with the fivefold lower price of illegal tobacco, would lead to a decline in the legal cut tobacco market by over 80%, with the possibility of the legal cut tobacco market being completely extinguished.

At the same time, similar prices for cigarettes and legal cut tobacco would be discouraging for consumers who, due to the currently more favorable price of tobacco compared to cigarettes, intend to switch to consuming legal cut tobacco. In the case of equalizing the prices of cigarettes and legal cut tobacco, consumers would certainly switch to consuming illegal tobacco.

Increasing the excise tax on cut tobacco by more than 10 KM per kilogram would lead to the erosion of the legal cut tobacco market, in the same way as happened with the cigarette market from the moment the new Law on Excise Taxes was introduced, with the note that the decline of the legal tobacco market would be significantly faster, as prices would not increase gradually as was the case with the increase in excise taxes on cigarettes, according to this analysis, reports Patria.