Taxing spirits out of the holidays

Christmas cheer by the glassful will cost a little more the next time around.

The 2010 budget passed by Parliament increases excise taxes on hard alcohol, which will result in consumers having to pay more for spirits. The tax hike requires distilleries to pay an additional 20 Kč ($1.11) per liter of pure alcohol sold, a price tag that will be passed on to consumers. At retail, a 1-liter bottle of liquor containing 40 percent alcohol will increase an estimated 6 Kč.

Set to take effect in the new year, the tax hike has angered producers and distributors, who say the higher prices will weaken demand and lower sales.

"The resulting effect of this tax collection effort by the government is, by definition, negative," says Jiří Štětina, managing director of Rémy Cointreau in the Czech Republic. "All the studies in many different EU markets prove that a government's intention to collect more taxes through increased excise taxes leads to a drop in consumption and an expansion of gray [illegal or semi-legal] production and distribution."

The same tax hike applies to imported alcohol. It will represent about a 2 percent increase in the retail price of premium imported liquors, though this is not considered a significant increase for a market catering to wealthier clientele.

"Clearly, the hardest hit will be low-end local spirits, which will have to increase sales prices 6 percent to 8 percent," Štětina said. "It could be devastating for them, but, obviously, this is too complex a thought for the Finance Ministry."

In an effort to keep prices down, local producers in particular will be sure to stock and report 2009 inventories before the Jan. 1 tax increase comes into effect.

The Czech Republic's excise tax on alcohol is average among all EU member states at 946 euros per hectoliter of pure alcohol (HLPA), higher than Austria and Slovakia, which plans an increase for March 2010, and less than Germany.

With the increased tax, Parliament has also passed supplemental legislation that will tighten regulations to combat the anticipated growth in black market alcohol production. According to a September report by the Union of Alcohol Manufacturers, the Czech alcohol market has faced a steady increase in black market distribution over the past five years, with sales now estimated at 10 percent of the market.

The additional legislation requires liquor bottles containing more than 1 deciliter of alcohol to have a tax stamp, a rule that presently applies to bottles with 2 deciliters or more of alcohol. The stamp is proof of tax payment and targets the widespread practice of producing bottles containing 1.99 deciliters of alcohol which often are used to circumvent taxes.

"Thanks to the mandatory labeling of spirits, we were able to substantially reduce the amount of illegally imported or manufactured alcohol used in the illegal manufacturing of alcoholic beverages," said Jiří Barták, spokesman for Customs Administration. "From this, along with the system of checks at marketplaces, we were able to put a squeeze on the sale of illegal alcohol."

There is, however, much to be done, says Anthony Schofield, CEO of Jan Becher, maker of Becherovka.

"They could improve controls in gastronomy outlets and significantly raise penalties for people who sell illegal alcohol," he told The Prague Post. "At customs, the control of goods that are not intended to be sold in the European Economic Area could be also improved, as they still appear on our market."

Parliament is also considering a proposal to ban retail sales of bottles more than 6 liters.

Taxes on beer will also rise in 2010; a 33 percent increase will add 50 hellers to the price of every 0.5 liters of beer.

"Of course, I do not agree with the tax hike," said Jan Veselý, president of the Czech Beer and Malt Association, which represents 95 percent of Czech brewers. "From the point of view of the Finance Ministry, I understand what they are doing, but, as someone who works in the industry, absolutely not. There are bigger targets to hit out there - like, how about slot machines?"

- Petr Cibulka Jr. contributed to this report.

Philip Heijmans can be reached at
pheijmans@praguepost.com