Among the industries already affected by Ukraine’s World Trade Organization entry are cognac producers, who were dealt a 43 percent tax hike.
Among the industries already affected by Ukraine’s World Trade Organization (WTO) entry are cognac producers, who were dealt a 43 percent excise tax hike as the new government led by Yulia Tymoshenko strove to conform with WTO and EU tax rates. Now cognac producers pay Hr 10 per liter of spirit produced.
“With the changes going into effect, we demonstrated conformity to the norms of EU directives,” said Hryhoriy Synytsia, chair of the excise tax department at the State Tax Administration, pointing out that taxes are still lower than those in the EU.
Ukraine’s cognac producers fear the new taxes will threaten their industry, stifle investment and innovation, and rejuvenate a black market, said Volodymyr Demchak, director of the Association of Wholesalers and Producers of Alcohol and Tobacco (SOVAT).
Prior to the increase, Ukraine’s cognac industry doubled its production in the last two years, according to SOVAT, and exports increased 37 percent.
The tax hike has already led to boosted retail prices, declining sales and accumulating bottles on store shelves, Demchak said.
“A month’s production stock was left in warehouses, since the consumer is not ready to buy products at the new price,” he said. “This happened for the first time in many years.”
The higher taxes coincide with across-the-board inflation, specifically higher prices for raw materials, industry leaders said.
“In recent years, enterprises invested into modernizing their equipment, technologies and expanding production sites,” said Andriy Okhlopkov, the chief manager of Soyuz-Viktan, adding that investment won’t be possible with the new challenges.
Part of the problem is the tax hike happened abruptly and without warning, decided on Dec. 27 and instituted on Jan. 1, leaving companies unable to change already-signed trade deals.
“A producer had to change his prices to include the tax’s expenses, but he could do that only after the tax law went into effect and all the contracts were already signed,” Demchak said.
Another problem is a fierce black market for cognac that industry players must constantly fend off. Higher retail prices for cognac gives illegal producers an opportunity to take advantage.
“This will be a disaster, as everything that can be cognac-colored will be,” said Inna Gunchuk, chief accountant of the Symferopol Wine Enterprise. “This stuff will be bottled underground and get to the market, of course.”
Cognac producers won’t be able to absorb the tax hikes through higher retail prices and some will simply stop producing, she said.
The Administration doesn’t anticipate further tax hikes, but cognac producers claim as soon as the parliament ratifies the WTO membership protocol, the tax will increase by an additional 215 percent.
“According to the bill to amend the budget, excise tax increases are planned to double, related to the talks to create the EU free trade zone,” Okhlopkov said.
The government is instituting reforms to provide clear mechanisms to administer the excise tax, to lower the tax pressures on producers and to reduce the black market, Synytsia claimed.
”With the aim of becoming a WTO member and getting ready for EU membership, it is necessary to establish excise taxes on tobacco, spirits and alcoholic beverages while taking national interests into account,” he said.
A successful government policy will raise the excise tax gradually, not ruining the industry’s investment ability nor cutting legal production levels, he said.
In Demchak’s view, “above all it is important to change the legislation to protect cognac producers and make it impossible for the industry’s black market to grow. Only after that can we begin to approach the tax issue.”
