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Amendments of the Excise Duties' Rates from 1 January 2011

EcovisLaw on the Excise Duties of the Republic of Lithuania (hereinafter Law on Excise Duties) is being amended quite often, since 1994 even several times per year.

According to part 1 of Article 2 of the current Law on Excise Duties the following goods are object to excise duty: ethyl alcohol and alcoholic beverages, manufactured tobacco, energy products and electricity.

One of the theories on the excise duty states that this tax is applied to non essential goods and in case of increasing of their prices consumers can easily renounce it. It could be easily admitted in case of alcoholic beverages or manufactured tobacco, but in modern society defining electricity and energy products (such as petrol or diesel) as non essential goods raises serious doubts. Even if a person could renounce to use his own vehicle because of higher price of petrol or diesel caused by increased excise duty, the increased price of the fuel would affect him anyway, because prices of all essential goods would increased due to higher rates of their transportation.

In Lithuania the electricity had been object to excise duty until 1 July 2002 and it was taxed again after 24 January 2004 when a new wording of Law on Excise Duties had come into force. According to point 3 part 1 Article 48 of the current Law on Excise Duties, household consumers as they are defined in the Law on Electricity are exempted from the excise duty on the electricity.

A new wording of the Law on Excise Duties came into force only on 24 April 2010, but it has been already amended. The amendments were approved on 30 November 2010 by Lithuanian Parliament. It should be mentioned that these amendments are still not signed by the President of the Republic of Lithuania and it will come into force only after her signature and its official publication.

The main reason for these amendments is Lithuania’s commitments to European Union (hereinafter – EU) to harmonize rates of excise duty with established by Directives and common to all EU Member States.

From 1 January 2011 rates of excise duty for manufactured tobacco and gas oil will increase.

New excise duty rates for manufactured tobacco products are defined with a view to implement the Directive 2010/12/EU of 16 February 2010 amending Directives 92/79/EEC, 92/80/EEC and 95/59/EC on the structure and rates of excise duty applied on manufactured tobacco and Directive 2008/118/EC.

The aims of excise duty established in the preamble of the Directive 2010/12/EU are worth of attention. For example point 2 indicates that bearing in mind that serious harm to health can be caused by tobacco products and that the EU is Party to the World Health Organization’s Framework Convention on Tobacco Control, various changes should be made to the Union’s fiscal legislation on tobacco products; point 7 states that the level of taxation is indeed a major factor in the price of tobacco products, which in turn influences consumers’, smoking habits;  point 8 says that in order to achieve greater convergence and to reduce consumption, the minimum levels of taxation in the EU for cigarettes and fine-cut tobacco intended for the rolling of cigarettes should therefore be increased. All these aims of the Directive confirm the theory that the rates of excise duty might be increased with a view of raising prices of several unhealthy products and thus to reduce its consumption.

According to the provisions of the Directive 2010/12/EU from 1 January 2011 the excise duty shall not be less than 64 EUR (221 LTL) per 1000 cigarettes irrespective of the weighted average retail selling price. Till now this rate of the excise duty was applied to the category of most popular cigarettes price and more expensive cigarettes. Corresponding provisions were transmitted to the Law on Excise Duties.

Smokers should be aware that this is not the last increase of the excise duty for cigarettes. According to the same Directive from 1 January 2014 the excise duty shall not be less than 90 EUR (311 LTL) per 1000 cigarettes. However Bulgaria, Estonia, Greece, Latvia, Lithuania, Hungary, Poland and Romania shall be allowed for a transitional period of this obligation until 31 December 2017.

According to the provisions of the Directive 2010/12/EU from 1 January 2011 the excise duty for cigars or cigarillos shall not be less than 12 EUR (42 LTL) per 1000 items or per kilogram.

In the initial draft of amendments of the Law on Excise Duties the legislator had had an intention to define the same rate of excise duty as in the Directive 2010/12/EU, but after the proposals of several members of Lithuanian Parliament the almost double rate was determined in Lithuanian Law, i.e. 23 EUR (80 LTL) for the kilogram of the product.

By the provisions of the Directive the excise duty for the smoking tobaccos was also increased and from the beginning of 2011 it shall be at least 40 EUR (139 LTL) per kilogram. The same rate was determined in the national law.  Also for the implementation of the Directive national legislator increases the excise duty for the smoking tobaccos as following: from 1 January 2013 it shall be 47 EUR (163 LTL) per kilogram of the product, from 1 January 2015 - 54 EUR (187 LTL) and from 1 January 2018 - 60 EUR (208 LTL).

The most important question would be how these amendments will influence tobacco’s price. The legislator who were responsible for the preparation of these draft amendments calculated that average retail price of pack of cigarettes will increase of 0.03 EUR (0.10 LTL); the price of the smoking tobaccos shall increase: from 1 January 2011 9.86 EUR (34 LTL) per kilogram of the product; from 1 January 2013 - 8.41 EUR (29 LTL); from 1 January 2015 - 8.41 EUR (29 LTL); from 1 January 2018 - 7.24 EUR (25 LTL).

One more amendment of the Law on Excise Duties which should enter into force on 1 January 2011 is related to the increase of excise duty rate for the gas oil. According to the Directive 2004/74/EC of 29 April 2004 amending the Directive 2003/96/EC as regards the possibility for certain EU Member States to apply, in respect of energy products and electricity, temporary exemptions or reductions in the levels of taxation Lithuania is committed to apply a transitional taxation period for the gas oil used not less than 302 EUR (1043 LTL) per 1000 l of the gas oil.

Actually a tariff of 275 EUR (947 LTL) is applied. From 1 January 2011 the excise rate for the gas oil will be the one established in the Directive 2004/74/EC, i.e. 302 EUR (1043 LTL) per 1000 liter of the gas oil. According to the legislators this would increase the average retail price of the diesel approximately for 0.03 EUR (0.12 LTL) per liter.

The harmonization of excise duties in EU is necessary for the successful running of the internal market. But for such a Member State as Lithuania which has a border with 2 third countries (Russia and Belorussia), the increase of the excise duty also means not only increase of the almost all goods’ prices (due to increased cost of transportation), but also a possible rise of tobacco and fuel smuggling from the neighboring third countries where the prices of those goods are lower. Discussions on possible expansion of smuggling are already taking place even before applying of the amendments.

But there are also positive news concerning the changes of excise duty in 2011. Law on Excise Duties was supplemented by a new Article 581 which exempts the natural gas used as a fuel for busses of the local (city and suburban) regular communication from the excise duty. According to the calculations done by the Ministry of Finance if this fuel would be exempted from excise taxation then the price of 1 m3 of the natural oil would decrease approximately for 0.27 EUR (0.92 LTL) and its price would be 0.51 EUR (1.77 LTL). The consumption of natural oil for one kilometer would decrease for 0.21 EUR (0.71 LTL) which would also influence the cost of transportation services and the decrease of the losses suffered by the transporters. Moreover, if the price of the natural gas decreases because of taxes, it is likely that little by little the public transport will start to use natural gas instead of gas oil. This would encourage the protection of environment.

On 7 December 2010 Lithuanian Parliament voted for one more amendment of the Law on Excise Duties according to which from 2011 the excise duty rate for the alcohol had to be reduced. Instead of actually applied 1280 EUR (4416 LTL) for a hectoliter of pure ethyl alcohol legislators intended to apply a rate of 927.54 EUR (3200 LTL). Also they intended to unify the excise duty rate for fresh grapes wine and other fermented beverages whose strength is not higher than 8.5 percent.  The proposed common tariff was 15.36 EUR (53 LTL) per hectoliter of the product. For the non indicated fresh grapes wine and other fermented beverages – 57.39 EUR (198 LTL) per hectoliter of the product.

By this amendment Lithuanian Parliament wanted to encourage people to buy legal alcoholic beverages and it was an attempt to reduce alcohol smuggling from the third countries. Even during the discussions on this amendment in the Lithuanian Parliament there were quite different attitude towards it. Those who had voted against this amendment stated that a reduced excise duty rate for the alcohol and herewith a reduced price shall simply promote the consumption of alcohol.

But this amendment was rejected by the President of the Republic of Lithuania. One of the arguments for the President’s veto was that a reduction of the excise rate for the alcohol will promote its consumption and increase the State budget deficit. In this circumstance the Law is taken back to the Lithuanian Parliament which will decide to vote once again for this law or to consider it as rejected. Considering the terms of coming into force of the new excise rate for the alcohol that are determined in this Law parliamentary decision concerning this amendment should be taken as soon as possible.

As a conclusion of the amendments of the Law on Excise Duty, it should be noted that from 1 January 2011 an increased price for the cigarettes, cigars, cigarillos, smoking tobacco and diesel is expected, but a reduced one for the natural gas used as a fuel for busses of the local (city and suburban) regular communication. As to the new excise rate for the alcohol the new decision of the Lithuanian Parliament has to be awaited.

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