CHEAP BUTTS COST THE STATE 660 MILLION HRYVNIAS
Last year the illegal supply of cigarettes in Ukraine reached 18.6 billion, 27% of total consumption. This enabled shadow dealers to gain a UAH 200-million net profit, while the state budget came up short UAH 660 million in revenue, reports the International Center for Public Policy Studies (ICPPS), which has conducted research at the request of the Coalition for Protection of the Rights of Intellectual Property.
“Smuggling in and sales of tobacco items in Ukraine have increased considerably and pose an extremely serious social problem,” ICPPS chief economist, Tetiana Sytnyk, points out. According to researchers, Ukrainian society is suffering tremendous losses due to the illegal import and handling of tobacco goods. The nation’s cigarette producers derive less profit and cannot count on fast return of their investment: with illegal supplies on the rise, they have cut output by 8.6% in 1999.
At first glance, it is profitable to buy low-quality cigarettes on the street or the city marketplace because they are cheap. In reality, this gain is negligible compared to the losses the consumer suffers from no guarantees of quality. For instance, in Russia it is not necessary to indicate on the pack the content of hazardous substances, thereby depriving buyers of the right to choose a higher quality product.
The main incentive for this kind of activity is the opportunity to make profit from cigarette price differences in Ukraine and Russia, which emerge due to differences in the excise duties. Especially different are the duties on unfiltered cigarettes: the Ukrainian excise rate exceeds the Russian one by more than 7 times. On the other hand, the Russian law differentiates excise duties on the diverse types of cigarettes, which results in an inessential difference between the duties on filter-tipped cigarettes in Ukraine and Russia, so this does not encourage mass illegal import of this class of cigarettes. This is why the structure of illegal supply is dominated by cheap unfiltered cigarettes accounting for about 94% of the total.
How do contraband cigarettes cross our border? ICPPS experts think this becomes possible due to inadequate control at the Russian border. This is the chain of illegal import and traffic: the carrier (he usually carries small lots of goods) — the firm that stores and distributes the goods — and finally the retailer. The current illegal imports can be taken on by about 1,500 people. If each of them makes two trips to Russia within 24 hours and each time carries 1000 packs of cigarettes, the researchers admit the profit from unlawful operations will be distributed as follows: 50% to carriers, 40% to small-lot wholesale firms, and 10% to retail traders.
Now, as the Coalition for Protection of the Rights of Intellectual Property believes, contraband incentives prevail over the risk of punishment. The State Customs Service, State Tax Administration, and Ministry of Internal Affairs are the key agencies in charge of combating the smuggling and illegal trafficking of tobacco items. However, the experts maintain, they do not coordinate their actions. Research shows that purely fiscal methods will not reduce smuggling; quite the contrary, they will only worsen the situation: reduced excise duties on tobacco items are, first of all, bound to bring down budget revenues. Moreover, reducing excise duties will run counter to the harmonization of Ukrainian and European legislation. For example, the EU-aspiring Eastern European countries are forced to drastically increase their excise rates, adjusting them to European requirements. This is why researchers suggest concentrating all efforts on enhancing the effectiveness of law-enforcement bodies; implementing the law passed by Verkhovna Rada on April 20, 2000, on the punishment of individuals dealing in the illegal import and handling of tobacco items, simplifying the conditions of legal cigarette trade, and strengthening border security.
