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. Last Updated: 07/27/2016

Duma Bill Raises Alcohol Tax

Despite record-high revenues at all levels of government, Russian officials have decided they need more cash and the best way to get it is to hit the bottle.

Excise taxes for various different types of alcoholic beverages have been mooted in recent weeks. The moves have drawn furious protests from businesses in the industry, who had been lobbying for a simpler tax regime and are now stuck with a more complex one.

At the end of November, the State Duma passed the first reading of a tax bill hiking the excise on beer to 0.90 rubles (3 cents) per liter from 0.72 rubles per liter. The increase occurred despite record-high revenues and a huge government surplus in recent months.

The federal government in November showed a surplus of 9 billion rubles ($334 million) - the highest in a decade - and now hopes to have a primary surplus of 83 billion to 90 billion rubles by year end, Interfax reported First Deputy Finance Minister Alexei Kudrin as saying last week.

However, this still leaves a gap in next year's budget, which sailed through the Duma in its final reading Friday. The 2000 budget calls for revenues of 855 billion rubles, an increase of 52 billion rubles ($1.63 billion) from the expenditure target written into the original draft of the budget discussed in August.

At the same time, a group of alcohol importers grouped in a committee of the European Business Club - an association that unites companies from the European Union doing business in Russia - forwarded a request to Moscow Mayor Yury Luzhkov lobbying for the introduction of a universal excise stamp on alcohol products.

The committee includes representatives from Allied Domecq, Bacardi-Martini, Hennessy, Malesan William Pitters, Pernod Ricard, Primalco, Remy Cointreau, Seagram, UDV-Diageo and Vin&Sprit.

Currently, alcohol producers have to slap two stamps on their products. One represents excise tax charged by the federal government and the other attests that duties charged by regional authorities have been paid.

The State Duma tried to stick a third excise tax on each bottle in the summer, but the proposal was bogged down during on-going discussions.

However, lawmakers couldn't resist the temptation to add red tape, forcing alcohol sellers to warn that people should abstain from drinking alcohol if they suffered certain diseases and states of health, such as pregnancy. The decision was made on Oct. 13 during a regular government meeting.

Given that red wine is harmful to people with ulcers and that vodka does no good to those with liver problems, every bottle containing alcohol needs to be accompanied with a medical encyclopedia, industry insiders complained.

"We have already recorded cases when retailers have refused to accept consigned goods [without labels giving health warnings]," said Alexander Romanov, the European Business Club's external affairs director.

He said this had not been a universal reaction but the issue needed attention before the New Year, after which the requirement will become obligatory.

The idea of introducing a universal excise stamp was floated by Vitaly Usov, deputy head of the Moscow city government's consumer goods department, at a conference in early November hosted by the Russian Union of Producers and Sellers of Alcohol, or ROSPA.

Usov was unavailable for comment this week, while other officials at City Hall shrugged their shoulders at the proposal.

"This is a good idea, but the introduction of a universal stamp would require a joint effort by the federal government and regional authorities," said a Moscow government official who declined to be identified.

The two-stamp system allows authorities at both levels to collect taxes, but manufacturers of alcohol cannot freely sell them in adjacent territories if they have paid the excise in another.

As a result, the alcohol market is divided into fiefdoms run by the governors, each of whom has some control over local alcohol producers.

Officials at ROSPA suggest shifting the tax burden to wholesale traders.

"This would create incentives for local traders to increase turnover, while currently they prefer to sell local products to avoid double taxation," ROSPA president Artur Perepyolkin said.

Local and federal authorities are unhappy only when taxes flow into the coffers of their competitors. The Moscow government, for instance, is unhappy about the higher excise on beer, which will benefit only the federal government.

"This is a negative development," said a City Hall official who tracks the alcohol market. "Beer is a popular drink among people with low income, and consumer demand is already hovering at its lows."

The Moscow government met last week with local beer producers, who complained of excessive taxation.

Beer production surged 70 percent in Moscow in the first 11 months of this year, while it leaped 32.8 percent in Russia in the first nine months.

The excise tax increase will bring 720 million rubles ($22.5 million) to the state coffers next year, assuming beer consumption remains unchanged.

Even though the lower house State Duma has to read the amendment two more times and approval by the upper house Federation Council is also required, industry officials have no doubt the tax will be raised.

"The tax increase will be enacted by decree," said Antonina Chernova, a deputy director with the Beer Industry Association.

In addition to the Duma proposal, the government has proposed raising excise tariffs on alcohol by 40 percent.