What is the economic impact of the illicit market?
What is the economic impact of the illicit market?
What is the Revenue Loss for Governments?
Revenue loss for governments includes both direct and indirect tax revenue loss. Direct taxes are paid by firms and individuals on their income. The rate of direct tax is usually determined by the government every year and is often uniform within certain income bands. Indirect taxes are taxes imposed on transactions and include excise tax, VAT, customs duties, entry tax (in India), and similar levies. Indirect taxes on alcohol in most countries are complex, with differential taxation across the types of beverages, alcohol content, geographic boundaries, etc.
The cost of illicit alcohol for governments can be calculated by summing together direct and indirect tax losses, as described below. It should be noted that this approach does not account for potential additional costs to governments ― which include enforcement costs, increased expenditures on healthcare and public welfare, and fiscal costs such as borrowing costs incurred to cover budget deficits due to lower tax revenue ― and, therefore, may underestimate the true costs of the illicit market borne by governments.
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Step 1: Calculating direct tax loss a) Determine the tax rate or rates for the given country or geographic region. b) Estimate the net profits lost to legitimate industry (see What is the Profit Loss for Legitimate Producers?). c) Apply the relevant rate of tax to the estimated net profit loss to industry such that: Direct tax loss = Net profits lost x Applicable rate of tax Step 2: Calculating indirect tax loss a) Determine various indirect tax rates for domestic production of alcohol within a country or geographic region. b) Determine indirect taxes on imports. c) Estimate loss of sales to industry (see What is the Profit Loss for Legitimate Producers?), calculated separately for domestic production and imports. This loss must be estimated for different kinds of alcohol corresponding to different tax rates (for instance, wine, beer, and spirits). d) Apply the relevant rate of indirect tax and import duty to the corresponding segment of lost sales such that: Indirect tax loss = Loss of sales to legitimate industry (by segment) x Relevant tax rate Step 3: Calculating loss of total revenue for governments Total revenue loss = Direct tax loss + Indirect tax loss
Source: TARI |
It is more difficult to quantify economic loss attributable to some categories of unrecorded alcohol than to others. This is particularly true of surrogates, where there is no legal equivalent beverage to which legal prices can be applied. Thus, an assumption needs to be made for what beverage the surrogate may be a substitute. For example, in Colombia prior research (Euromonitor International, 2014) has assumed that surrogates replace the most common and cheapest spirit in the legal market (aguardiente), and applied the average price of aguardiente to surrogate volumes. One limitation of this approach is that it relies on the assumption that consumers of surrogate alcohol will, in the absence of surrogate products, substitute a legal product like aguardiente.