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Why cigarettes are becoming more expensive in Ukraine?

Author : Olena Holubeva

Source : 112 Ukraine

Since January 1, 2021, the specific rate of excise duty on cigarettes has increased by 20% and is UAH 1,088.64 (39 USD) per 1,000 cigarettes, and the minimum rate is UAH 1,456.33 (52 USD) per 1,000 cigarettes
11:00, 13 January 2021

Channel 24

"The price of traditional cigarettes is expected to increase not only due to the increase in excise taxes but also with the increase in production costs (increase in the cost of electricity, the size of the minimum wage and other macroeconomic factors)," the press service of British American Tobacco Ukraine (BAT) noted.

Cigarillos will also rise in price. The tax rate on them from January 1, 2021, is equal to the tax rate on cigarettes. Cigarillos will belong to a separate product subgroup, for which a tax rate of UAH 1,456.33 (52 USD) per 1,000 pieces is provided. Additionally, an annual increase in the minimum excise tax liability for cigarillos by 20% until 2025 and the introduction of an ad valorem tax rate of 12% are provided, the press service of Philip Morris said.

As a result of changes in taxation for cigarillos, one can expect an increase in prices for tobacco products from the Lviv factory (sold under the Marvel trademark). Until recently, manufacturers of tobacco products have deftly used the legislative gap – the Ukrainian legislation does not regulate the definition of cigarillos and how they should differ from cigarettes. At the same time, they were less taxed than cigarettes. Thus, cigarettes with a flavored filter and wrapped in brown rather than white paper could be passed off as cigarillos and sold for less than the price of cigarettes. Equalization of excise rates eliminated this possibility.

Related: National Operator in tobacco market to be created in Ukraine

Why Logic Compact leaves the market

In early December, the JTI Ukraine tobacco company announced that it was stopping the sale of Logic Compact electronic cigarettes in Ukraine. “JTI Ukraine decided to stop selling Logic Compact products in the consumer market of Ukraine, as the forecast for the growth of the total volume of the category of electronic vaporizers in Ukraine did not come true. The trend in Ukraine reflects the global trend towards a reduction in the volume of retail sales of electronic vaporizers in the world,” said Gintautas Dirgela, director of corporate relations at JTI Ukraine.

According to her, the decision coincided with changes in the current legislation of Ukraine, according to which all liquids for electronic cigarettes that were produced before January 1, 2021, are considered unmarked and prohibited for sale. Since the law does not provide for any transitional periods and all liquids that were already on the market were banned. Also, since January 1, 2021, Logic Compact replaceable cartridges are not available for sale. The changes that came into force on January 1, 2021, are contained in paragraphs 226.9, 226.11 of Article 226 and other provisions of the Tax Code, in accordance with the Law of Ukraine N 466-IX of January 16, 2020. "We believe that this decision goes against the principles of quality regulation," Gintautas Dirgela clarified.

 “JTI remains committed to offering an alternative to smoking - we are monitoring market developments and consumer demand in Ukraine in order to offer an alternative that best meets this demand at the right time,” she said.

Another manufacturer of cigarettes with vaporizers of nicotine-containing liquids, JUUL, has not yet announced its official withdrawal from Ukraine, but, according to rumors, this will happen soon. Unofficially, market participants said that the company has significantly reduced the staff of its Ukrainian office.

In an official comment to 112.ua, JUUL stated that they are not going to leave the Ukrainian market.

“To further our mission, Juul Labs must prioritise how we use our resources to execute on our long-term, methodical approach. We remain committed to Ukraine and we are working on the continued availability of our products in Ukraine.”

Related: Ukrainian tries to smuggle cigarettes to Poland, gets caught

In the cases of Logic Compact and JUUL, it was about sealed capsules with nicotine-containing liquids, produced in accordance with the standards of these manufacturers. Ukraine is literally flooded with Chinese vaporizers and semi-legally produced liquids in the country, the quality of which – the content of nicotine, glycerin, impurities – is not controlled by anyone. On Google, you can easily find dozens of offers for the purchase of both smoking devices and liquids, among other things with a taste of marijuana.

In theory, from January 1, 2021, such liquids should also rise in price: an excise tax of UAH 3000 (107 USD) per 1 liter of liquid is introduced on them. For them, mandatory labeling with excise stamps and the requirement for sellers to acquire licenses for the production and sale of electronic cigarettes (28 USD per year) are introduced. But whether tax and law enforcement agencies will be able to monitor compliance with these norms is a big question. Until recently, they failed to solve the problem with online sales of illegal alcohol and fakes of well-known alcoholic brands, which is one of the factors due to which about 50% of the alcohol market in Ukraine is in the shadows.

Sticks for IQOS and GLO to rise in price

Open source

According to the norms of Law No. 466-IX that came into force, this year excise taxes on heated tobacco have undergone the most radical changes - they have increased immediately by 320%. In accordance with this, sticks for IQOS - HEETS should rise in price to a price higher than that of cigarettes, which will also rise in price due to an increase in excise tax by 20%. Earlier in PM warned that with such a radical increase in excise tax, the price of sticks should rise from 1,9 to 2,8 USD.

In connection with a 320% increase in excise tax for heated tobacco, the company sent a letter to President Zelensky. She warned that such a step "will lead to a reduction in investments from the company in its own production and will cause a halt in investment in Ukraine."

PM replied that the company "is going to take on part of the excise tax so that those who have chosen products with harm reduction potential do not return to cigarettes." At what price HEETS will be sold this year, the PM did not specify, noting, expressing the hope that "the state will also revise the approach to taxation of tobacco for heating, as it is done in the EU." The company is unlikely to agree to a sharp increase in retail prices for HEETS, as it is fraught with smuggling from Moldova, Russia, and Belarus.

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PM told that they previously "considered the possibility of investing in lines for the production of tobacco for heating at the Kharkiv factory, but the actions of the state do not motivate us to continue investing in Ukraine."

With the increase in excise tax on heated tobacco, the main competitors of PM in the alternative segment in Ukraine, BAT, should also raise prices. Until recently, the price of sticks for GLO was comparable to the price of HEETS – 1,9 USD per pack.

"The price of sticks will depend on the market conditions, at the moment we are developing a pricing policy for these products, taking into account tax changes in the market and consumer behavior," the BAT press service replied. The company also clarified that they do not plan to withdraw GLO from the Ukrainian market (against the background of messages about Logic and JUUL leaving).

Along with the excise changes in 2021, the sale of electronic cigarettes to minors is prohibited at the legislative level, and administrative liability has been introduced for violating this prohibition. Putting this norm into practice will be as difficult as controlling the sale of Chinese vaporizers (vapes) and illegally produced liquids for them, especially online.

This year, the list of places where the use of electronic cigarettes is prohibited, for example, in places where competitions are held in which minors participate, have been expanded.

The tobacco market is fading

The result of a sharp increase in the tax burden on the tobacco industry will be an increase in the shadow and illegal sales, and as a result - a decrease in excise tax revenues to the budget, the interlocutors said.

"Given the rapid growth of excise tax rates on all types of products, there is a very high risk of further growth of illegal trade, both counterfeit and contraband from various countries of the world. Unfortunately, in Ukraine, we observe a significant increase in the share of illegal products on the market," BAT press service informs.

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"In a rapidly changing business and regulatory environment, it is difficult to predict the development of the market. In recent years, we have seen an increase in the illegal cigarette market and are very concerned about this," JTI said.

The complexity of the situation lies in the fact that law enforcement agencies with tobacco smuggling in the country are reluctant to fight.

"I think many of you could observe the layouts with cigarettes near transport stops, underground passages, which openly sold counterfeit or contraband products. Despite our numerous appeals to the police, we have to state literally a complete lack of reaction to these phenomena from the side of law enforcement agencies," said the press service of BAT.

One of the tobacco companies anonymously told us a case about how tobacco workers tried to take public control of the sphere of the destruction of illegal cigarettes. A huge wagon with thousands of blocks of contraband was subject to disposal. To burn them, the customs officers set up a small stove. Within a few days, it became clear to the representatives of the tobacco companies that they would have to give up their work and only go to the stove - the disposal of such a quantity of cigarettes would take about a month. And that's just one truck! It is easy to guess where the surviving cigarettes went, after the representatives of the tobacco companies realized the futility of their efforts – new packs arrived at the grandmother's stalls in the crossings.

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