Excise duty gap on cigarettes

Abstract

The largest part of indirect taxes is excise duty and there are significant loses in tax revenues from illegal trade of such goods as cigarettes due to the fact they are taxed with a very high excise duty burden and therefore there is a very high level of smuggling and illegal trade in all European Union member states. The expansion of the illegal market to the eastern borders of the European Union has been driven by an increase in excise duties on cigarettes, with subsequent price rises. Some of the previous studies were trying to find the best methodology for measuring the tax gap but there were indicate some difficulties and no common approach to estimate excise duty gap on cigarettes in the European Union. The authors are used a top-down methodology to designed a methodology how to estimate the excise duty gap on cigarettes. The objective of this article is to present an overview study of tax gap estimations, calculate the excise duty gap on cigarettes in Latvia, discuss the best practice how to limit the tax gap and protect the legal market, as well as develop recommendations for improvement of tax administration. The problem of protecting the legal market by stoppage and reduction of cigarettes smuggling is on the agenda of the European Union.