What goes around, comes around. It has been a public secret for years that a big part of the wine and spirits industry in Bulgaria is in the grey economy – with the economic downturn eating into Budget revenues, the Government now appears determined to get more of the excise duties it is owed, which will likely mean tighter controls and additional expenses for the industry.

At the end of 2009, Parliament passed amendments to the Excise Act to strengthen the Cabinet’s rights to oversee the production of goods that are subject to excise duties, but left the specifics out, to be determined by regulations set out by the state institutions involved. The draft regulations have already incurred the displeasure of the industry, since in its desire to catch tax-dodgers, the Cabinet will make life harder for legitimate businesses.

For example, the excise duty on wine is zero per cent, but the new regulations will apply to wineries as well, since many of them distill spirits from leftover materials, which opens the door for possible tax evasion.

The loud protests have ushered in a series of meetings between the Finance Ministry, the Customs Agency (which collects excise duties) and industry representatives in order to find the best balance between the interests of the revenue agency and the private business.

Tighter controls
The National Revenue Agency (NRA) and the Finance Ministry want the production process to be monitored in real time, through electronic sensors that would feed data to the NRA. Such sensors would have to be installed at several key points in the production process, including the start and finish, and would have to monitor not just the alcohol content, but the amounts being produced as well.

The sensors would then feed into the warehouse management system, so that the Customs Agency has data on the amount of materials used, the amounts produced, quantities being stored and in retail circulation.

The existing system takes the data from the production system, but it has to be input into the warehouse management system manually, which allows the figures to be manipulated, the Customs Agency said.

The new system would close the entire cycle, closing the loopholes for illegal spirits production. When the figures show a discrepancy, Customs officials would have to investigate on site. Effectively, the new regulations combine distance controls with paperwork control and checks on site.

Customs officials said that the new system would make their job easier, since the agency would only check on site whenever there are discrepancies in the figures.
The need for stronger oversight has existed for some time. About half of the spirits production is illegal because no excise duty is paid on the produce. Often, this high ratio is explained with the small countryside installations for homemade spirits, but the industry is dodged by suspicions that even some of the big companies are no strangers to illegal production.

In an interview with Kapital in September 2009, the head of the Customs Agency, Valyo Tanov, said that the state loses about 100 million leva in unpaid excise from the top 10 spirits makers and a comparable amount from the tiny distilleries that dot the countryside.