UPDATE 2-Czech parliament approves lower tobacco tax rise

(Adds FinMin quotes, plan to limit stockpiling)

By Jan Korselt and Marek Petrus

PRAGUE, Nov 8 (Reuters) - Czech lawmakers approved on Wednesday a lower than originally proposed increase in excise tax on tobacco from 2007, matching the minimum level required by the EU and raising the spectre of a shortfall in budget revenue.

A majority of lower house deputies voted for a rider, which curbed the planned tax rise originally put forward by the previous centre-left government.

Finance Minister Vlastimil Tlusty told reporters the levy on the best-selling domestic cigarette brand would rise by some 10 crowns per pack, against the previously proposed 13 crowns.

The tax increase would come into force in January, provided it wins the approval of the Senate, the parliament's upper house, and is signed into law by President Vaclav Klaus.

European Union membership has required Czechs to gradually lift tobacco taxes toward EU levels, which are currently expected to be reached with another tax rise planned for 2008.

Top Czech cigarette maker Philip Morris CR <TABKsp.PR> has eagerly awaited the new legislation, as it partly absorbed previous excise tax hikes rather than raising prices, which took its toll on earnings and hurt its share price earlier this year.

Lawmakers agreed to the lower tax hike at a time when Czech public finances are crumbling and the fiscal deficit is forecast to jump to 4 percent of gross domestic product next year, well above the 3.0 percent threshold for joining the euro zone.

Deputy Finance Minister Bohdan Hejduk told Reuters last month the budget, targeting a deficit of 91.3 billion crowns ($4.17 billion), faced a possible shortfall of as much as 5 billion crowns if the parliament curbs the proposed tax hike.

But Tlusty said the original proposal aimed to bring about 8 billion crowns in extra revenue but he played down the expectations that tax collection must necessarily fall as a result of the lower rise.

"In past years, a 10 percent excise tax rise on tobacco led to a drop in collection ... I think there is a higher chance of filling the state coffers with this lower increase," he said.

The burgeoning fiscal deficit, fed by a sharp rise in welfare spending and seen unlikely to fall below 3 percent before 2010, has forced the Czech Republic to abandon its target to join the euro zone in 2010.

As part of the tax amendment, the lower house also approved a plan to limit the hoarding of old, lower-tax cigarette excise labels by producers and importers. An April tax hike is not expected to boost retail prices until December because of the hoarding.

Philip Morris CR would benefit from the new regulation as it sells 53 percent of its production on the domestic market, which means that its costs rise much more than do those of its competitors when it is forced to stockpile after a tax hike to avoid losing market share. ((Reporting by Jan Korselt; Writing by Marek Petrus; Editing by Ron Askew; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477)) ($1=21.91 Czech Crown)

Keywords: ECONOMY CZECH TAXES