In five years, illegal tobacco market in Ukraine has grown to 18.1%, the media says

The rapid rise in excise duties on tobacco products has led to a similar trend in the illegal market. Because of this, the budget of Ukraine won't receive, according to experts, about 14 billion hryvnias in 2021. In the five years since 2017, the illegal tobacco market has increased from 2.3% to 18.1%.

According to RBC-Ukraine, such figures were announced during a joint press conference held recently by the leaders of four global tobacco manufacturers operating in Ukraine, JTI, Philip Morris, British American Tobacco, and Imperial Tobacco.

At the beginning of 2020, smuggling and counterfeiting accounted for 5.8% of the tobacco market, and only a year later, in February 2021, their share increased to 12.8%. And as of November, according to Paul Holloway, CEO of JTI Ukraine, it reached 18.1%.

"In 12 months, the growth of the illegal market was 300%," Holloway said.

"The share of the illegal market has reached an all-time high and continues to grow. According to Kantar, the losses of the state budget of Ukraine will reach 14 billion hryvnias," says the director of BAT Ukraine Kakhaber Benidze.

For the state budget, there is no desired effect in the form of additional tax revenues after the increase in excise duties. And this is due to the reduction in the production of legal producers, which is observed in all four companies that are among the top 10 largest taxpayers in the country. Thus, according to Philip Morris Ukraine CEO Costas Salvaras, the company's production capacity is only 60% occupied. Tobacco excise taxes in Ukraine, which account for up to 70% of the price of a pack of cigarettes, have increased by 244% since 2017, according to Rastislav Chernak, director of Imperial Tobacco in Ukraine. And with each price increase, the demand for cheaper illegal products increases.

"We do not see a significant increase in excise tax revenues. You can buy alcohol and tobacco on the Internet without excise stamps. In the center of Kyiv, you can buy a pack of cigarettes for UAH 20, while we have a minimum tax liability of UAH 29," Danylo Hetmantsev, chairperson of the Verkhovna Rada Committee on Finance, Tax and Customs Policy complains.

The growth of the illegal tobacco market was accompanied by an increase in tobacco excise taxes in the EU. The problem was especially acute in Lithuania, where the share of illegals reached 50%. It was necessary not just to stop the growth of excise duties, but to introduce a moratorium on their increase. And no other recipe for countering the growth of the illegal tobacco market was invented. In Ukraine, legal tobacco manufacturers also propose not to reinvent the wheel, but to slow down the growth rate of excise duties from 20% per year to 10%.