The Government is to discuss a draft today that assumes further increases in the cigarette excise tax as of April 2005 and January 2006. In 2005 it should increase to CZK 0.60 per cigarette plus 0.24% of the cigarette retail price from the current CZK 0.48 and 0.23%. Moreover, the minimum per-cigarette tax should rise from the current CZK 0.94 to CZK 1.13 in 2005 and CZK 1.36 in 2006. By 2007 excise tax should make up 57% of the retail price. The tax cannot fall below EUR 60 per 1,000 cigarettes. This limit should rise by another EUR 4 in 2008. The above news is largely neutral as it has been known for a long time and the increase is in line with our estimates.
Note that the increases (i) might reduce consumption, and (ii) will shift cigarette consumption towards cheaper brands (and possibly illegal imports and/or local production), where PM CR has a weaker market position. Indeed, the last tax hike in April 2004 likely contributed to the 4pps decrease in PM CR's market share in the CR in H1 2004 to 75.5%, and further decrease cannot be ruled out in coming years subject to the company's pricing policy.
Tomáš Gatěk