Anti-alcohol campaign: the never ending saga

The production and trade of vodka may be nationalised. President Dmitry Medvedev has asked the prime-minister, Vladimir Putin, ‘to evaluate the existence of necessary conditions’ and ‘determine the possible time’ for the introduction of a state monopoly on alcohol.

By December 1 the government must also decide on the introduction of minimal retail and wholesale prices on vodka.

Also, it has been suggested that drinks with alcohol content of over 7% (as opposed to 9% at present) will no longer be considered as low-alcohol products. This means that the same restrictions will be imposed on most brands of beer as on vodka and brandy.

Tax revenue from alcohol is an important source of income for the state. The retail price of a half-litre bottle comprises 38 roubles (~USD$1.2) of excise duty and 10 roubles (~USD$0.3) of VAT, while the cheap, and most popular, vodka costs 100 roubles, half the sale goes to the treasury.

Miraculously, from year to year the amount of illegal trade remains roughly the same at a staggering 30% of the legal market.
 

After the abolition of the state monopoly on alcohol in 1991 the government tried to introduce some order into the industry. In vain. The modern history of business in Russia is that of a war in which the government wins a local battle from time to time but is always defeated in the end.

The problem lies in the peculiar system of taxation. Producers of pure alcohol pay a fraction of the overall tax, 26 roubles per one litre of the product. Vodka makers – basically, they just mix alcohol and water – pay 185 roubles.

It would be much simpler to tax the spirit producers: they are few, the technology is complex, and they are easier to keep an eye on. In that case, however, taxation would take place at the point of production, and that would be unfair and have no chance of support from local authorities. Transfer of taxation closer to the place of consumption is what the regions want but it is much, much more difficult to administer.

In the attempt to find a compromise, a system was introduced whereby 20% (as opposed to 50% previously) of excise went to the local budget and the rest was distributed by the federal government among all regions in proportion to their population. Unfortunately, the magic formula did not work: local governments seemed to have lost interest and did not bother to control the vodka dealers.

In this respect the brewers look like a tempting target. The production process does not consist of two distinct stages; it is technologically sophisticated and easier to control. Moreover beer companies are loyal and pay tax.

Nationalisation of vodka production is easier said than done. The state does not have the infrastructure, skills, or people. Most importantly, however, it is not clear why companies run by state servants would be any better at paying tax. Nationalisation does not solve the root problem: corruption.

 

September 14, 2009.

 

 

The production and trade of vodka may be nationalised, but it is easier said than done.
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