6.2. Proposals – how to protect local tobacco growers and state revenues

In the year 2000, 42,231 metric tons of raw tobacco were imported to Ukraine with an average price of 2.55 USD per 1kg. With the import duty tariff being 1 euro per 100 kg, the state revenue should be 422,310 euro (about 370,000 USD). If the duty was the same as in Russia (5%), the average duty would be 12,75 USD per 100 kg and state revenue would be 5,384,000 USD. To protect domestic tobacco growers, which produce cheap tobacco (the average export price in 2000 was 1.18 USD per kg), it is reasonable to establish a high specific tax to discourage the import of cheap tobacco from other countries. Let us consider two options:

1) Duty is increased 10 times – to 10 euro per 100 kg. Under these circumstances, the revenue would be about 4,000,000 USD (less than with 5% duty). The price of imported raw tobacco would increase by 3% on average, and it would hardly encourage producers to use domestic raw tobacco. The average weight of cigarettes produced in Ukraine in the year 2000 was 0.78 grams, and so about 60 packs of cigarettes are produced from 1 kg. The duty increase (9 euro per 100 kg) would cause increase of pack price by 0.0015 euro or 0.0075 UAH. With the average price of each pack being 1.5 UAH, it means only a 0,5% increase.

2) Duty is increased 50 times – to 50 euro per 100 kg (less than in Poland, but more than in the EU). Under these circumstances, the revenue would be about 20,000,000 USD. The price of imported raw tobacco would increase by 17% on average, and for tobacco in the same price category as exported domestic tobacco, it would increase by 40%. A price difference such as this could encourage producers to use domestic raw tobacco. That shift could decrease raw tobacco import, and import duty revenue would be less than above mentioned. However, if the main aim is to protect local tobacco growers, it is quite defensible when taking into account the fact that the revenue be would much more than the present revenue. The cigarette pack price would increase by 0.008 euro or 0.04 UAH (with VAT and other taxes – about 0.05 UAH). With the average price of a pack costing 1,5 UAH, it means a 3% increase. A moderate price increase such as this could reduce total consumption (which is main aim of public health) and only slightly increase smuggling.

RECOMMENDATION TO AUTHORITIES: Cancel the law provision on obligatory content of domestic tobacco in cigarettes produced in Ukraine as unjustified from international law, national economics and public health views. A substantial increase of raw tobacco import duties is the best solution for the national economy and public health, while it is definitely against the vested interests of tobacco industry.

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