As of July 31st, 2015, the beer market has shrunk by 17%, which is in large part due to the March 1, 2015 increase of excise tax on beer. The beer sector’s growth between 2006 -2014 and the scale of import substitution between 2007 and 2015 confirm the strength and potential for growth in the beer sector. Excise tax on beer in Georgia is higher than in 17 European Union countries.

Stemming from changes made to the tax code on December 12, 2014, the excise tax on malt beer increased from 40 tetri to 60 (per liter) on March 1st, 2015. Together with malt beer, excise tax on spirits and other alcoholic beverages rose.

It is notable that the volume of beer on the Georgian market increased by 45% between 2006 and 2014, according to the beer producers’ data. Between 2011 and 2014, demand on the Georgian market varied between 100 and 105 million liters. Currently, approximately 3% of the Georgian beer market is imported, whereas 97% is produced locally. The share of local production increased from 60% in 2007 to 97% in 2015, which indicates that beer production is not only growing but also but also has become an import replacement.

According to the beer producers’ forecast, the market has the potential to grow from the current 100-105 million liters to 350 million liters. Despite this, from March 1st, 2015 to July 31st, the market has shrunk by 17% in the same period of 2014, according to the Revenue Service. On the basis of the beer producers’ data, we can conclude that the decrease was largely caused by the increase in excise tax.

According to international best practice, excise tax should generally be applied to a product or service which is detrimental to health, damages or pollutes the environment, or has other negative side effects. Consequently, increasing excise tax is primarily for regulatory rather than financial purposes. From the nature of excise tax, it follows that malt beer, spirits, and other alcoholic beverages should have different rates based upon alcohol content. In the case of beer, there should be different rates for high alcohol content (e.g. 8%) and low alcohol content (e.g. 2.5%) beer, which is also part of the Association agenda.

According to the 2015 state budget, the Ministry of Finance plans to mobilize an additional GEL 30-40 million from the increased excise tax rate on malt beer, spirits, and other alcoholic beverages. The Ministry, however, does not know what share will be raised through the increased rate on beer. As is well known, beer has a relatively low volume of alcohol. Therefore, it is unclear what are additional health risks that the Ministry is concerned about in relation to beer consumption, which have prompted the 50% increase of an already high excise tax (Excise tax on beer first increased in 2010, when it rose from 20 tetri to 40 tetri per liter).

The inconsistent approach to excise tax is also notable. After the 2006 Russian boycott on Georgian products, including wine, excise tax was abolished. After the boycott was lifted, excise tax on wine was not re-introduced. It is not clear why there was a 50% increase of excise tax on beer when there is no excise tax on wine, a more alcoholic beverage.

At the same time, the Ministry has not forecasted the fiscal effect of the decrease in beer sales caused by the 50% increase of excise tax, and consequently, the decline in other taxes paid by the producers to the government. The higher excise tax might either push taxes paid by the producers down or make it impossible to collect more in taxes from them. The government should also consider indirect, negative externalities such as decreased employment, lower salaries, and decreased investment among other negative externalities.

The business environment has been complicated by Article 171 of the Civil Code, which went into force in September 2014. The Article prohibits the consumption of beer in public places and gives the police the right to issue fines in accordance with the Code of Administrative Violations. This caused a decrease in total beer consumption by 26.5% in October and by 28% in November of 2014.

It is notable that before the decision to increase excise tax on December 12, 2014, excise tax was higher than in 11 European Union countries. After March the 1st, 2015, excise tax on beer was higher than in 17 European Union countries. The increase in excise tax could not have been prompted by the European Union directives, because according to EU directive (92/ 84 EEC) the obligation to harmonize the structure of excise tax does not enter into force until September 1st, 2017. Apart from this, the harmonization of excise tax means that high and low alcohol content beers should have different excise tax rates.

The growth of beer production and the extent of import replacement between 2006 and 2014 leads us to believe that the sector has significant potential for growth. This potential has already been hampered by the increase in excise tax. The decrease in the volume of the beer market has already hindered reinvestment, as per the beer producers’ data.

Transparency International Georgia believes that:

• As a result of the 50% increase, excise tax is disproportionately high. It is higher in Georgia than in 17 European Union countries, which has hampered local producers in one of the economy’s most successful sectors;

• To help create a predictable business environment in the country, decisions such as the increase in excise tax should be discussed with potentially affected industries/businesses before rather than after decisions are made. In the present case, we believe that this communication should have occurred in the spring of 2014, before the initiative was introduced;

• The Ministry of Finance and the Revenue Service should monitor the effect which the increase of excise tax has had on beer sales. If the sales of beer producers’ decline so much that their taxable profits start to decrease, the amount of taxes being paid to the budget will follow suit. It is possible that because of declining profits, the amount that the government is taking in will decline to a greater extent than by the increased income that the government will receive from the higher excise tax;

• We believe that the Government of Georgia should also discuss repealing the ban on consuming beer in public places.