Finance (Excise Duty on Tobacco Products) Bill, 1977 ( Certified Money Bill ) : Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Parliamentary Secretary to the Minister for Finance (Mr. Wyse)

This Bill is designed to comply with Ireland's obligation as a member of the European Communities to introduce with effect from 1st January, 1978, the Community system of levying excise duty on cigarettes. The Community system has been in operation since 1973 in all member states except this country and Britain who during accession negotiations were allowed until 1st January, 1978, to change over to the Community system because of difficulties involved in changing from their traditional system. The system under which both countries have operated consists in levying the duty on the weight of raw tobacco. The Community system, on the other hand, requires that: (a) the duty be levied on the end-product that is, on the manufactured cigarettes, and (b) the duty must consist of a combination of a flat-rate element per cigarette and a proportional element related to the retail price. The Bill provides the legal and administrative framework to implement the new duty and many of its provisions are, accordingly, technical.

Each member state is free to decide, within upper and lower limits, the precise combination of flat-rate and of proportional duty it will apply. It is, of course, free to determine the actual rates under each of these elements. The Community, however, aims at progressively narrowing the gap between the upper and lower limits so as to achieve, in the interest of facilitating trade within the Community, a larger degree of harmonisation of the structure and basis of charge of the duty in all member states. The first stage of harmonisation which commenced in 1973 provided upper and lower limits on the flat-rate element to be applied by the member states of 64 per cent and 4 per cent of total tax. Discussions are at present proceeding with a view to setting narrower limits for the second stage which will probably commence in July next year.

The structural change required to comply with EEC obligations will of itself alter the relative impact of taxation in Ireland on different sizes and qualities of cigarettes. The flat-rate element in the Community system, because it is the same on all cigarettes, has the effect of narrowing the spread of cigarette retail prices, while the ad valorem element increases with higher prices and consequently encourages a wider retail price spread. While overall the average duty incidence on cigarettes will not be changed, the new system will generate changes in cigarette prices. For the reasons I will now indicate, we will be applying a relatively high flat-rate element and this will result in a narrower price spread on our market.

In implementing this new excise duty system, it is necessary to achieve a combination of the tax elements which will not only meet the interests of revenue but also take account of the the position of the Irish industry. The Irish tobacco manufacturing industry, which currently employs some 2,200 people, has been influenced by the form of the tobacco duty prevalent for many years. The impact of the different composite taxation system required by the Community will inevitably cause changes in the market pattern, and it is important that, at least in the initial stages, the resultant difficulties should not be compounded for the Irish industry by the adoption of such a combination of the flat-rate and proportional elements as could be prejudicial to their competitiveness. With this consideration in mind Ireland is seeking, during the discussions in the EEC on the proposals for a second stage of tobacco tax harmonisation, to obtain a high upper limit for the percentage of total taxation to be attributed to the flat-rate element.

As I said already, the second stage will, it is expected, commence on 1st July 1978. We will, however, be entering the Community system on 1st January next when the first stage of harmonisation will still be in operation. It is proposed that the combination of the elements which will be applied here from 1st January, 1978, will be 60 per cent specific and 40 per cent ad valorem duty. The rates for each of these elements for cigarettes would then be as follows: £8.00 per thousand plus 15.7 per cent of the retail price.

In accordance with the provisions of section 2 of the Bill the new rates of duty will be provided for by way of Government Order.

Our Community obligations in regard to the structural harmonisation of excise duty on tobacco products extend only to cigarettes. However, it would be inconvenient to manufacturers to maintain, in conjunction with a post-manufacture excise on cigarettes, the existing pre-manufacture excise on tobacco for other products. The Bill, accordingly, provides for the levying of an end-product duty, which will be proportionate to the weight on pipe tobacco, cigars, "roll-your-own" tobacco and chewing tobacco. This change to an end-product duty structure should not result in any price increases.

The proposed rates are as follows: Cigars, £6.817 per lb.; Cavendish or negrohead, £6.889 per lb.; Hard pressed tobacco, £4.406 per lb.; Other pipe tobacco, £5.538 per lb.; Other smoking or chewing tobacco, £5.753 per lb.

Senators will not be surprised when I say that the foregoing rates for cigarettes and other tobacco products are designed to maintain existing revenue yield.

I now wish to draw the attention of Senators to certain of the detailed provisions of this Bill. Under the new system, excise duty will be levied at the point where manufactured goods are invoiced to traders; at present the duty is levied on the tobacco leaf at the point where it leaves the bonded warehouse for the factory. Under the current system, payment of duty on leaf tobacco may be deferred to a date not later than the end of the month following that in which duty is charged.

Section 3 provides that, under the new system this period of deferment will run from the new point of charge of the duty but, in order to avoid a revenue shortfall, a "catchup" arrangement will apply in December which curtails the deferment arrangement for that month, making due before the end of December half of the payment in respect of goods released from bond in that month. The new deferment arrangements will provide, from the manufacturers' point of view an overall improvement in relation to deferment facilities while, thanks to the "catch-up" arrangement, there should be no revenue shortfall for the financial year.

Senators may also be interested in the provisions of section 6 which deals with duty-paid tobacco stocks held by tobacco manufacturers on 1st January, 1978. In order to avoid double duty payment on these stocks, it is proposed that the duty charged on the stock then held be offset against the duty payments due from the manufacturer at the end of January. This will enable the new system to operate fully from 1st January, 1978, establishing a clean break from the existing system.

The provisions of the Bill are described in some detail in the accompanying explanatory memorandum, but if further information is required at this stage I shall endeavour to answer any queries raised in the debate.

I commend the Bill to the House for a Second Reading.

Mr. Alexis FitzGerald

This is one of these unusual occasions on which we have nothing to do but welcome the Bill as it is a consequence of an EEC decision, part of the harmonisation process. This is the first time since the joint committee were established that we have had actual legislation which deals with an EEC directive. I wonder whether I should not take the opportunity, as a past member of that committee and a proposed member of the new committee, to suggest that some practice be established with regard to legislation relative to directives, regulations and so on that come from Europe where the joint committee have made a consideration of the matter and published a report. With the masses of documents that flow in to Members of both Houses it is almost impossible for busy Members to keep a tag on the documents and relate them to the various measures. Perhaps the Executive might do the legislature the civility of reminding them that the committee already have made a report on the matter which is now being legislated on. This could be done by way of reference in the memonandum generally circulated with Bills or in the Minister's speech, or in some other manner.

This particular one was very well studied, considered and reported on. It is fair to say that the Minister and his predecessor have moved along the lines which the joint committee, having heard everybody, wished them to move along. They might not have done so and it might then become all the more relevant to consider what they had reported. This is just a suggestion. A question for the consideration of the House also is how they could monitor this matter. In saying that it is also right to take the opportunity of saying that the Minister's departmental officials have assisted that joint committee, giving their views on the documents they have had to consider so that the committee are in a position to make an objective report to the House. There never was a division on party lines in the joint committee in the past. That is a general point I though worth making as it could be more important in other cases.

In relation to what is proposed here I wish to express what I understand is involved for us in this change. There is not a great deal of advantage in going into a general discussion on whether a proportional system of taxation of tobacco or of anything else is better than a specific system. The fact is that we have always had in relation to tobacco a specific excise duty on the weight of tobacco which tended to make our tobacco industry one geared to usage of a high-cost product. In that situation what people concerned with the economy must look at is not the general theoretical advantages of proportional over specific taxation but, at this time and during the medium-term time in which people actually live, what is most desirable for this community.

It seems to be agreed generally and by the joint committee that the advantage for our industry at this moment lies in keeping as low as possible the proportional element in the rate of taxation. We are talking about an industry which thinking in Ferenka terms is, in terms of employment, 50 per cent greater than Ferenka. It gives employment to approximately 2,200. If the last figures I heard are still the relevant figures it is an industry which we should be concerned to protect even if it is only from the point of view of employment.

We are concerned to keep the proportional element as low as possible and that should continue to be the case, It is very important when we realise this harmonisation derives from Article 37 of the Treaty which is directed against discrimination of any kind. The more proportional the taxation system the greater the advantage enjoyed by the producers who are able to produce in conditions of low cost.

Traditionally, our industry has not been geared to that type of production. The re-equipment and the retraining involved in that would be difficult. There is a certain degree of protection in the home market involved in taste and habit and so on which will prevent import penetration which will damage the industry, but there are limitations on that. Therefore, we are forced in our own national interest to focus attention on the realities behind this harmonisation policy. It favours those countries which have state monopolies in their tobacco industry. It favours France and Italy as potential exporters to us, and it favours them against us by enabling them to protect their markets from any penetration we might attempt to make in those markets.

The proportional system of taxation obviously multiplies the advantage in manufacturers' direct costs. If you have got a monopoly situation such as the Italian one, when I looked at it the last time it was not possible to discover at what cost Italian tobacco was in fact being produced or whether it was receiving any justifiable profit or not. In that type of situation a subsidy which is pushed in at the point of the manufactured cost gets multiplied by the taxation into an advantage which is far greater than the retail price, and it is very much in our interest, when we are harmonising our system of taxation, bringing it into line with what is generally in the continental system, to remember that.

The commission are proceeding at a snail's pace for political reasons in enforcing the breakdown of the monopolies. They will continue to proceed at a snail's pace unless we and other interested parties operate in relation to it. This is also relevant to such exports as we engage in. These exports are to the United Kingdom and are generally under contract from the United Kingdom, and if these producers themselves get under pressure from imports into the UK our exports to the UK will be affected similarly and employment reduced.

This brings me to another point, and that is the economies of scale which is part of the manufacturing cost element. The economies of scale which are enjoyed in the UK constitute a greater danger because of the cultural overlap, the taste factor, the practice of using Virginia tobacco, common to both countries. The economies of scale with the proportional system of taxation will give the UK exporter to our market an increased advantage. These exports at the moment are minimal, the degree of the Irish market becoming penetrated being very modest indeed. This could be different and therefore all our energies, so far as we are concerning ourselves with the tobacco industry, must be concerned to reduce the proportion of rate and keep it under control. I think this is the Government's policy and it is a policy which will be shared by all the parties in this House.

Mr. Jago

I realise that the Minister for Finance will so arrange the duty that the same income will be produced by way of foreign tobacco. I have looked at the Bill from the point of view of that section of our community which is most criticised as weak-willed, that is, the cigarette smoker. I am one. There is no definition in the Bill of what is a cigarette, but the Bill specifies in section 1 subsection (3) the length of cigarette on which the tax is paid, a flat tax based on a cigarette of nine centimetres not including any filter or addition at the end of the cigarette. It does not state what the circumference of the cigarette should be, nor does it state anything about the contents of the cigarette. The most popular cigarette at the moment on the market, during a recent advertising campaign by the manufacturers, is what is known as the king size cigarette. The measurement of that cigarette is six-and-a-half centimetres of the smoking part and two centimetres of the filter, a total of eight-and-a-half centimetres in length. The flat tax rate on that will be .8p. But if you produce a cigarette of nine centimetres, plus two centimetres filter, it will still be .8p duty on the longer cigarette.

With the introduction of a tobacco substitute, which might be successful or might not be, there does not seem to be any reason why the tobacco should not be weakened. Therefore, what is the manufacturer likely to do in a competitive market? The larger cigarette as compared with the smaller cigarette means probably very little in the labour content of manufacture. The longer cigarette will obviously have less tax per centimetre of cigarette and, per centimetre of cigarette, the base on which the retail price is calculated, the price will be less per centimetre. Is it likely in the future that the manufacturer in a competitive market can offer the smoker the best value by producing a longer cigarette? What would happen if the smoker, who probably smokes the same number per day, is going to smoke more in the future than he did in the past?

I do not know why they brought in this system in the EEC. Then there is the basis of control. In other words, the control, under the Bill, appears to be based on the fact that you have a record of the import material—a record of losses and waste and a record of what goes out of the factory. Therefore, what you are controlling is a tax on a product made— it need not necessarily be a cigarette —at the end containing the amount of tobacco which it does at present.

I do not think the Bill would cover a cigarette which did not contain tobacco because the Bill refers to tobacco products and therefore it is possible that if a cigarette comes on the market which has got substitute tobacco it will then be duty free.

Mr. Keating

I have listened to two informed speeches by people who clearly possess both interest and special information, Senators FitzGerald and Jago. I had the unhappy experience of seeing sectors of our industry severely damaged in EEC circumstances, and of making trips to Brussels and pulling the tails of people's coats and trying to use the machinery and being unable to give adequate protection to the people in question, important and numerous in terms of proportion of our total labour force, like textiles, clothing, footwear and furniture which are important traditional industries and have been severely damaged in Community circumstances.

The nonsense that we were told was that on the one hand when you have free trade in products you will get compensatory regional arrangements to help disadvantaged areas. It did not happen. I listened to the arguments. I recognised, without knowing much about them, the existence of State monopolies in France and Italy. I was interested in the argument about the relative significance of a proportional and a flat rate. Senator FitzGerald said what seemed to me to be the most important thing, simply the economies of scale—big versus little. What is happening in the Community is that people say in the name of liberalism in the European sense with a small “1”, in the name of free trade: “We will dismantle all barriers to the movement of goods and we will equalise all the circumstances in which competition takes place and we will do it as quickly as possible.”

I cannot subscribe to that. That is central to the ideas of the Community, but it seems to me absolutely crazy for a little country like ours. The analogy is a boxing match where there is a heavyweight and a featherweight and all the things which might be a handicap are removed and the fight is made equal. We know who will win— the big one will.

We know the economies of scale and the financial and marketing clout they have. In these circumstances they are going to threaten the jobs of 2,000 people. Senator Jago said he is a smoker. I am not. I am a reformed smoker and am now a bigoted anti-cigarette man. The next time I lapse I will become permissive again. I am not really very concerned about the interests of smokers. I think what they are doing is putting up the health contributions for the proportion of the population who do not smoke, because they are wilfully damaging themselves in ways that are perfectly measurable and that are now well known, and it is a mistake to keep on doing that. There should be two rates of health contributions—for smokers and nonsmokers, and various other categories of insurance ought to be at different rates.

However, I am just declaring my lack of support for anything that makes cigarette smoking easier or cheaper. I am very interested in the jobs of 2,000 people and, therefore, I am moved to ask whether it is necessary to do this at all now and had we not better be dragged kicking and screaming right up to the legal limit and possibly over it and into court before we proceed any further with harmonisations with the Community when the Community are notably dilatory in producing the sort of countervailing wealth transfer across national boundaries that would be involved in a real regional policy, if there was one. There is not a real regional policy, and until there is, on a serious commitment to it, I query the wisdom of any further harmonisation of any kind. In regard to every aspect of our industry I would be as obstructive and as protectionist as it is possible to be and do the thing not on the day that it became legally necessary but after a series of appeals to the European Court, if necessary for two, three or four years after it became legally necessary.

Parliamentary Secretary to the Minister for Finance (Mr. Wyse)

First of all, this Bill is the result of an EEC directive. It is moving towards harmonising a system. Discussions took place long before this Bill was prepared to ensure that there was no injustice which would put our manufacturers in jeopardy and consumer interests were also considered.

It is a rather technical Bill. I should like to deal first with a point raised by Senator Keating. This became necessary in 1973, so we had five years. Personally I could not agree with the point made that it will jeopardise Irish industry. We must remember that we are members of the EEC and we have got to play out part. In drafting the Bill and in order to fall into line with the move towards harmonisation, all aspects of the trade must be taken into consideration. Furthermore, since the Bill passed through the Dáil we have had no representations from manufacturers suggesting any amendments. So I assume that after the prolonged discussions with all concerned the change over is agreeable to all concerned.

In reply to Senator FitzGerald, the directive behind this Bill was not discussed by the joint committee because the directive was adopted before our accession to the EEC. A later stage of the harmonisation which I referred to in my speech was discussed by the joint committee.

As I said at the outset deferment is to my mind a tremendous facility to manufacturers not offset by the fact that they would be paying for half the month of December, before the end of January. At least the manufacturer has had a breathing space to prepare for a duty that might have been levied during the whole of December. That has been a great help to manufacturers.

Senator Jago talked about cigarettes. If a cigarette contains tobacco then it is considered a cigarette and as the Senator said it would not be a cigarette otherwise. Under the EEC directive we will be obliged to charge the same flat rate on all cigarettes. Section 1 (3) of the Bill provides for the charge on each nine centimetre of a cigarette, and that is included in anticipation of further stages of harmonisation. Under the definition of "tobacco product", cigarettes made wholly or partly from tobacco are chargeable for duty on the same basis. I hope that clarifies the position for Senator Jago.

Senator Keating mentioned health, but of course this is a finance Bill and the Senator's point should be directed to the Minister for Health who I understand is considering the preparing of legislation on the subject.

Question put and agreed to.

Agreed to take remaining Stages today.

Seanad Éireann debate - Wednesday, 14 Dec 1977