Lend your money and lose your friend, says an old proverb. The Russian Finance Ministry risks losing friends in the wine industry with its proposal to impose a new excise on producers, and then compensate them for their losses.
The Duma is considering higher excise rates on wine and spirits, both local and imported, and is likely to approve them in the northern autumn. From January 2020, the excise tax is expected to rise to 30 roubles (50 cents) per litre of still wine, and to Rb40 per litre of sparkling wine. The previous rate was equal to Rb18 per litre of still and Rb36 of sparkling wine. Russian producers of wines with Protected Geographical Indication or Protected Denomination of Origin status pay only Rb5 per litre and Rb14 per litre. Many of them fear the coming tax increase will be a serious challenge, in spite of a promised accompanying tax deduction.
“Any increase of the excise tax will be directly projected onto the shelf price, and wine consumers are very price-sensitive in Russia,” says Igor Samsonov, CEO of the Satera winery. “Wine will become less competitive a category, especially if compared with beer or other drinks containing alcohol.” He estimates that medium-priced wines of Rb350-700 ($5.50-$11) will become 15% to 20% more expensive.
Andrey Grigoryev, managing partner at the Double Magnum wine consultancy, presumes the total excise taxes paid by Russian wine market operators may rise to Rb9bn, but consumers will pay up to Rb20bn more because the shelf price will inevitably be multiplied by mark-ups.
The argument for
However, many Russian wine producers hail the new law, considering it protectionism.
“Today’s excise tax in Russia is not as big as [the tax] in Great Britain, for instance,” says Mikhail Nikolayev, managing partner of the Lefkadia Valley Winery. “Raising rates to make imported wines more expensive seems quite natural and correct. The whole world is doing that. Barriers for imports are now much lower in Russia than in many European countries, whereas they should be mirror-like.”
“Tax preferences for young, developing industries are normal, and they do not contradict WTO rules,” agrees Grigoryev. “But any increase in taxes is not very good for the market.”
“The new law is very likely to pass the Duma’s final vote,” says Leonid Popovich, president of the Russian Union of Winemakers and Winegrowers, “although some essential corrections should be made.”
A special tax deduction is expected to compensate Russian wine producers for any loss from the increased excise tax. An additional but symbolic excise tax of Rb30 per ton will be imposed on grapes harvested for winemaking; however, if producers can prove the grapes came from the wine’s geographical indication, they will get a deduction equal to what is paid as an excise on wine.
“It is true that the compensation procedure is not yet clearly defined by legislation,” says Popovich. “But we need to make sure conscientious producers of Russian appellation wines get complete and timely compensation.”
Paperwork ahead
“It is quite clear that wine producers will have to pay much higher tax in 2020, but when can we expect the tax deduction?” Samsonov says. “I am afraid what we can really expect next year is facing a shortage of working capital.”
Grigoryev is worried about medium-size and smaller wineries for which the new taxation model may become a serious problem. “It is not easy to get any payback from the state,” he says. “Normally, it requires a lot of bookkeepers’ time and paperwork. Not all the wineries are capable of doing that.”
Ironically, the initial idea to increase the excise tax was born from the government’s good intentions to lighten the tax burden on Russian wine producers.
Soon after new categories of Protected Geographical Indication and Protected Denomination of Origin were created about three years ago, a privileged excise rate was introduced for those wines: Rb5 instead of Rb18 per litre of still wine, and Rb14 instead of Rb36 per litre of sparkling. But an inaccurate use of terminology allowed some importers of European AOC and DOP wines to be the first to benefit from the new legislation. It took a few months for the Russian tax authorities to identify the mistake, and importers were obliged to pay the tax difference in retrospect. Importers reacted with a coordinated PR campaign, both in the media and on wine blogs, claiming that “unjust” tax difference do not conform to WTO standards. The Russian Finance Ministry decided not to argue and suggested increased excise taxes for all parties.
