Business does not support an increase in excise tax

09/ 10/ 2020

From January 1, 2021, in Ukraine, it is proposed to increase the rates of excise tax on alcoholic beverages by 11.6%. The corresponding initiative is being introduced by the draft law №4101 and alternatives to it, registered in the Verkhovna Rada in September. At the same time, according to the EBA experts, an increase in excise tax rates of recent years has led to a reduction in sales of legal products and failed to increase revenues to the state budget which is reverse to the expectations stated in the explanation of the draft Law №4101. Thus, in 2017, the excise tax on alcoholic beverages was increased by 20%, however, it did not provide additional revenues to the state budget as expected. On the contrary, the increased tax led to the reduction of revenues. Thus, in the period from 2014 to 2017, the rate of excise tax on alcoholic beverages increased by 125%: from 56.42 hryvnias per 1 liter of 100% alcohol to 126.96 hryvnias per 1 liter of 100% alcohol. However, the revenues increased by only 14%. According to the State Treasury Service of Ukraine, in January-June 2020, almost 13% more excise tax revenues were received from the production of alcoholic beverages, and more than 22% from imports compared to the same period last year. The business once again emphasizes the importance of a stable tax burden for the development of a particular area. It is also worth noting that in December 2019, the law on the demonopolization of the alcohol industry was adopted and came into force on July 1, 2020. This law provides, inter alia, the privatization of distilleries. However, the main consumers of the alcohol industry in Ukraine as of 2020 are producers of alcoholic beverages (80% of all rectified alcohol produced is used for their production), while the share of alcohol exports does not exceed 2% of total production. Besides, the EU-Ukraine Association Agreement sets a quota for ethanol exports to the EU of 85,400 tons, which will amount to 100,000 tons in 2021 and is not expected to be revised, which can also constitute a barrier to exports of both finished products and raw materials. This means that investors who are interested in purchasing distilleries will be forced to focus on the declining domestic market for the production and sale of products and raw materials. However, factors that will contribute to the negative trend of the industry (namely, an increase in excise tax rates by 11.6%) may affect the investment attractiveness of the acquisition of distilleries, and hence reduce the revenue to the state budget. At the same time, the share of the illegal alcohol market continues to grow, and another increase in excise tax rates will only contribute to the exacerbation of this negative trend. Thus, according to the State Statistics Service of Ukraine, more than 50% of the volume of hard alcohol on the market is illegal, and this is the reason for the legal business to suffer serious losses. Moreover, the increase in the tax burden by the state during the economic crisis due to the COVID-19 pandemic may put legal alcohol market operators in Ukraine in an even more difficult financial position, deepen the crisis in the industry and limit opportunities for systemic development. Therefore, the European Business Association calls for refraining from increasing fiscal pressure during the crisis, which, in general, applies to the provisions of the draft law №4101. Otherwise, the losses for the business will be even more painful, and some companies will probably be forced to suspend their operations altogether. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

At the same time, according to the EBA experts, an increase in excise tax rates of recent years has led to a reduction in sales of legal products and failed to increase revenues to the state budget which is reverse to the expectations stated in the explanation of the draft Law №4101.

Thus, in 2017, the excise tax on alcoholic beverages was increased by 20%, however, it did not provide additional revenues to the state budget as expected. On the contrary, the increased tax led to the reduction of revenues. Thus, in the period from 2014 to 2017, the rate of excise tax on alcoholic beverages increased by 125%: from 56.42 hryvnias per 1 liter of 100% alcohol to 126.96 hryvnias per 1 liter of 100% alcohol. However, the revenues increased by only 14%.

According to the State Treasury Service of Ukraine, in January-June 2020, almost 13% more excise tax revenues were received from the production of alcoholic beverages, and more than 22% from imports compared to the same period last year.

The business once again emphasizes the importance of a stable tax burden for the development of a particular area. It is also worth noting that in December 2019, the law on the demonopolization of the alcohol industry was adopted and came into force on July 1, 2020. This law provides, inter alia, the privatization of distilleries. However, the main consumers of the alcohol industry in Ukraine as of 2020 are producers of alcoholic beverages (80% of all rectified alcohol produced is used for their production), while the share of alcohol exports does not exceed 2% of total production. Besides, the EU-Ukraine Association Agreement sets a quota for ethanol exports to the EU of 85,400 tons, which will amount to 100,000 tons in 2021 and is not expected to be revised, which can also constitute a barrier to exports of both finished products and raw materials. This means that investors who are interested in purchasing distilleries will be forced to focus on the declining domestic market for the production and sale of products and raw materials. However, factors that will contribute to the negative trend of the industry (namely, an increase in excise tax rates by 11.6%) may affect the investment attractiveness of the acquisition of distilleries, and hence reduce the revenue to the state budget.

At the same time, the share of the illegal alcohol market continues to grow, and another increase in excise tax rates will only contribute to the exacerbation of this negative trend. Thus, according to the State Statistics Service of Ukraine, more than 50% of the volume of hard alcohol on the market is illegal, and this is the reason for the legal business to suffer serious losses.

Moreover, the increase in the tax burden by the state during the economic crisis due to the COVID-19 pandemic may put legal alcohol market operators in Ukraine in an even more difficult financial position, deepen the crisis in the industry and limit opportunities for systemic development.

Therefore, the European Business Association calls for refraining from increasing fiscal pressure during the crisis, which, in general, applies to the provisions of the draft law №4101. Otherwise, the losses for the business will be even more painful, and some companies will probably be forced to suspend their operations altogether.

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.