Major business associations urge the Parliament to support a gradual increase of the excise tax

15/ 03/ 2021

The European Business Association, the American Chamber of Commerce in Ukraine, and the Union of Ukrainian Entrepreneurs once again appeal to the Verkhovna Rada of Ukraine to consider the gradual increase of taxes on tobacco and heated tobacco products (HTPs). The EBA members estimate that the tax policy of recent years, which was based on a sharp increase in excise tax rates, has negatively affected the tobacco market and has become an ineffective tool for generating additional budget revenues. The annual 20% increase in the cigarette tax rate is quite significant and needs to be revised. Thus, it is proposed to introduce the annual 10% rate increase by 2030. Besides, it is extremely important for the industry to eliminate negative practices and remove provisions from the Tax Code of Ukraine on indexation of excise tax rates on tobacco products, taking into account the proposed schedule of annual growth of excise tax on such products. It should be noted that since January 2021 there has been an unprecedented increase in the tax rate for HTPs by 320% in accordance with the Law of Ukraine №466-IX On Amendments to the Tax Code of Ukraine to improve tax administration, eliminate technical and logical inconsistencies in tax legislation. Such a radical tax increase triggers the alarm signal for all investors, as it demonstrates the state course has deviated from the principles of a balanced and predictable tax policy. EBA has repeatedly stressed the possible negative consequences of the implementation of these changes, which will have a devastating impact not only on the industry but also on the economy as a whole. First is the threat that the illegal market of HTPs will grow and bring considerable losses to the state budget. According to preliminary estimates of the EBA experts, the legal market of HTPs may decrease significantly, which will lead to a shortfall in the planned revenues from the excise tax on HTPs if the norms of the current version of the Tax Code are not revised. In order to prevent these risks, the VRU Committee on Finance, Tax, and Customs Policy supported the need to revise the tax on HTPs at its meeting on February 25, 2021. The corresponding amendment was made to the second reading of the draft law №4278 On Amendments to the Tax Code of Ukraine (on taxation of goods moved (shipped) with international postal and express transportation services) and provides for a gradual increase in the HTPs tax rate by 200% in 2021, and by 30% annually from 2022 to 2025. Adoption of the amendment will preserve the projected tax conditions and protect the legal market of HTPs, which will ensure a gradual increase in budget revenues, protection of investments in the economy of Ukraine, and attract new ones. Therefore, the EBA calls on the leadership of the Verkhovna Rada of Ukraine and all peoples deputies to support the gradual increase of HTPs tax rates during the consideration of the draft law №4278 at the next plenary session. We would like to draw your attention to the fact that in the EU countries there are separate tax rates for cigarettes and HTPs, as the practice of differentiation is applied. With this in mind, the business proposes to discuss the differentiation of these rates in favor of HTPs in the future after the adoption of the amendment to the Tax Code, as well as to initiate changes to the previously adopted plan of the gradual annual increase in cigarette tax rates, providing for a gradual annual increase of 10% by 2030 and the abolition, respectively, of the indexation of tobacco products. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

The EBA members estimate that the tax policy of recent years, which was based on a sharp increase in excise tax rates, has negatively affected the tobacco market and has become an ineffective tool for generating additional budget revenues. The annual 20% increase in the cigarette tax rate is quite significant and needs to be revised. Thus, it is proposed to introduce the annual 10% rate increase by 2030. Besides, it is extremely important for the industry to eliminate negative practices and remove provisions from the Tax Code of Ukraine on indexation of excise tax rates on tobacco products, taking into account the proposed schedule of annual growth of excise tax on such products.

It should be noted that since January 2021 there has been an unprecedented increase in the tax rate for HTPs by 320% in accordance with the Law of Ukraine №466-IX “On Amendments to the Tax Code of Ukraine to improve tax administration, eliminate technical and logical inconsistencies in tax legislation.”

Such a radical tax increase triggers the alarm signal for all investors, as it demonstrates the state course has deviated from the principles of a balanced and predictable tax policy.

EBA has repeatedly stressed the possible negative consequences of the implementation of these changes, which will have a devastating impact not only on the industry but also on the economy as a whole. First is the threat that the illegal market of HTPs will grow and bring considerable losses to the state budget. According to preliminary estimates of the EBA experts, the legal market of HTPs may decrease significantly, which will lead to a shortfall in the planned revenues from the excise tax on HTPs if the norms of the current version of the Tax Code are not revised.

In order to prevent these risks, the VRU Committee on Finance, Tax, and Customs Policy supported the need to revise the tax on HTPs at its meeting on February 25, 2021. The corresponding amendment was made to the second reading of the draft law №4278 “On Amendments to the Tax Code of Ukraine (on taxation of goods moved (shipped) with international postal and express transportation services)” and provides for a gradual increase in the HTPs tax rate by 200% in 2021, and by 30% annually from 2022 to 2025.

Adoption of the amendment will preserve the projected tax conditions and protect the legal market of HTPs, which will ensure a gradual increase in budget revenues, protection of investments in the economy of Ukraine, and attract new ones.

Therefore, the EBA calls on the leadership of the Verkhovna Rada of Ukraine and all people’s deputies to support the gradual increase of HTPs tax rates during the consideration of the draft law №4278 at the next plenary session.

We would like to draw your attention to the fact that in the EU countries there are separate tax rates for cigarettes and HTPs, as the practice of differentiation is applied. With this in mind, the business proposes to discuss the differentiation of these rates in favor of HTPs in the future after the adoption of the amendment to the Tax Code, as well as to initiate changes to the previously adopted plan of the gradual annual increase in cigarette tax rates, providing for a gradual annual increase of 10% by 2030 and the abolition, respectively, of the indexation of tobacco products.

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