Revenues on cigarettes excise increased in 2019 while consumption decreased

According to the State Treasury, during the period of January-December 2019, UAH 44.14 billion was received from tobacco excise taxes to the State Budget, which is 0.6 billion or 1.3% higher than in 2018. At the same time, according to the State Tax Service, the sale of cigarettes has decreased by 11 billion units or by 20%, compared to 2018.

“The increase in revenues was expected to be much higher as the excise duty rate on tobacco products was raised by 20% in January and additionally by 9% in July 2019. Such moderate increase in excise tax revenues is due to a number of factors, such as a further reduction in tobacco consumption in Ukraine and a decrease in cigarette smuggling from Ukraine to Europe. However, the main factor was the tobacco industry’s actions, called stock pilling. The main goal of these actions is to artificially increase the wholesale sales of cigarettes and excise duties in the run-up to the excise duty rate. This allows to pay excise duty at a lower excise rate and then sell cigarettes at retail within the months when the tax rate is higher. Revenue growth can be greater if measures are undertaken to prevent artificially reducing tax payments by tobacco producers,” explained Konstantin Krasovsky, expert at the Advocacy Centre “Life”.

In the fourth quarter of 2018, 19 billion cigarettes were sold in Ukraine, and in the first quarter of 2019, only 7 billion were sold, which is almost three times less. It is clear that Ukrainians did not smoke three times less. If the sales were even, – 13 billion cigarettes each quarter, then the 2018 budget would be about 5 billion hryvnias less (38 billion in total) and the 2019 budget 6 billion more (or 50 billion hryvnias in total). Revenues would increase by about UAH 12 billion, or 30%, which would correspond to the rate of excise duty growth.

Due to these factors, sales of cigarettes in Ukraine in 2019 decreased significantly. In the period of January-December 2019, 43.3 billion manufactured cigarettes were sold domestically. Total import was approximately 45 billion cigarettes, 11 billion cigarettes or 20% less than in 2018.

It is widely believed that the decrease in the legal sale of cigarettes is automatically offset by the growth of the illegal market. According to the Ukrtyutyun Association (association that represents Big Tobacco in Ukraine) data (most likely overestimated), the illegal market share has grown from 4.4% in 2018 to 7.2% in 2019. Estimates show that the illegal market in 2018 was (56 billion * 0.044 = 2.46 billion), and in 2019 – (45 billion * 0.072 = 3.24 billion cigarettes). Thus, the illicit market, increased by only 0.78 billion cigarettes. The legal market has shrunk by 11 billion cigarettes.

It may seem that tobacco manufacturers have suffered from such a large reduction in cigarette sales even more than the state budget. In the period of January-November 2019, tobacco producers sold cigarettes for 13 billion hryvnia (excluding taxes) in Ukraine. In the corresponding period of 2018, they sold products at a slightly lower amount – UAH 12.8 billion. However, sales of cigarettes in 2019 decreased by 20%. The fact that manufacturers received even a little more money from a much smaller number of cigarettes is due to the fact that in 2019 they raised – price of cigarettes by 20% at a 4% inflation rate during the year.

One of the factors reducing the sales of cigarettes in Ukraine was the reduction of their consumption by the population. This is confirmed by data from annual Household Surveys conducted by the State Statistics Service. In the second quarter of 2019, only 25.7% of households reported spending money on tobacco. In the II quarter of 2018, there were 28% of these households, which is 9% more.

A significant increase in excise duty rates in Ukraine in 2016-2019 also reduced the volume of cigarette smuggled from Ukraine to the European Union. According to KPMG, these volumes decreased from 5.8 billion cigarettes in 2016 to 4.2 billion cigarettes in 2018. Accordingly, the sale of cigarettes in Ukraine has also decreased.

Overall, in 2008-2019, cigarette sales in Ukraine decreased from 125 billion to 45 billion cigarettes which is 80 billion or 64% less. State budget revenues have increased from UAH 3.6 billion to UAH 44 billion, or nearly 13 times. The main factor behind these changes was the increase in the excise duty rate from UAH 0.5 per pack of cigarettes in 2008 to UAH 20 in 2019.

“Thus, the policy of substantially increasing the rates of excise duty on tobacco products has contributed to both a reduction in consumption of the deadly tobacco products and an increase in revenues to the state budget. This effective tobacco tax policy should be maintained in Ukraine,” said Lilia Olefir, Executive Director of NGO Advocacy Centre “Life ”.

According to the current tobacco taxes will increase annually by 20% till 2025. In order to increase the effectiveness of excise policy in Ukraine, it is necessary to implement, following the example of European countries, effective measures against the tobacco industry’s actions aimed at artificially reducing the tax payments such as stock pilling.

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