For nine months now, the Verkhovna Rada has been considering an increase in excise taxes on tobacco products (draft law 11090), and for nine months the public has been emphasizing that the tax preference for heating tobacco products (HTUs) is unacceptable, while the tobacco industry has been stubbornly bending its line and using all possible methods of pressure to get its way.

This is the opinion of Yaryna Yasynevych, program manager at the Center for Liberation Movement Studies. For Lb.ua, the expert spoke about the draft law No. 11090 initiated by the Ministry of Finance of Ukraine, which, among other things, proposes to increase the excise tax rate on cigarettes to 90 euros per 1000 pieces, while for gadgets (HTPs) – only to 72 euros by 2028.

This will create a 20% tax discount for such products, which is completely unfavorable for Ukraine.

On November 27, the Committee on Finance, Taxation and Customs Policy finally supported Draft Law 11090 and recommended it for the second reading, preserving the tax preference for HTPs.

The vote is getting closer, and it is becoming increasingly clear that the issue of excise taxes is far from being about budget revenues. Read more in Yaryna Yasynevych’s column on the publication’s website, as well as the key points below.

Under the cover of the IMF. Reversal of the effective policy of taxing HTPs on the same level as cigarettes

In the debate on draft law 11090, tobacco lobbyists are shouting that HTPs are in the white zone and “it is better not to raise taxes on them on a par with cigarettes so that people buy legal sticks, not cheap counterfeit cigarettes.”

But the fact is that today a pack of HTPs costs the same as premium cigarettes (UAH 95 – 115), so even if the price of heating cigarettes rises less than we would like, buyers of illegal cigarettes are unlikely to buy HTPs, which require an expensive device to be purchased.

The Ministry of Finance, which initiated the draft law No. 11090, has been defending the tax preference from the very beginning and did not hesitate to point out that it is a compromise with tobacco companies that is beneficial for the state. I would like to emphasize that such cooperation contradicts the WHO FCTC and Ukrainian legislation (Article 4 of the Law of Ukraine No. 2899-IV). 

At the last working group on the draft law No. 11090, Danylo Hetmantsev, chairman of the Committee on Finance, Taxation and Customs Policy, said that the discussion was closed, as the International Monetary Fund had expressed its support for the excise tax exemption for HTPs: “Having received an official position from them, unfortunately, we, unfortunately, would like to do what we want to do, but we can only do it if we finance ourselves.”

But in this way, we are giving up 20 billion hryvnias over 4 years! Instead, we will ask our partners for it. So this recommendation seems illogical both for the IMF and for Ukraine to implement.

Interestingly, the IMF did not come to either the Ministry of Finance or the Committee with recommendations, but rather the Ministry of Finance together with Hetmantsev asked about the IMF’s position.

But does the International Monetary Fund really demand a 20% tax exemption for the fuel and energy sector?

In the correspondence between the Ministry of Finance and the IMF, the latter recommends a range of excise rates for HTPs from 45 to 90 euros per 1000 units, but at the same time notes that it is necessary to balance financial and health goals.

Our financial goals are much more critical than those of European countries, whose experience tobacco lobbyists appeal to. In addition, the average excise tax on cigarettes in the EU is 177 euros per 1000 pieces, while we will reach 90 euros only in 2028 (according to the plan of the project №11090).

Our health care goals are no less critical: in Ukraine, mortality is three times higher than the birth rate, about 100,000 people die of tobacco every year, and consumption of HTPs is growing rapidly, especially among young people.

I would like to emphasize that heating tobacco products already have a lot of advantages over cigarettes: flavored and flavoring additives (which, worst of all, make smoking “tasty” for children), brand advertising is allowed, and there are no graphic warnings about the risks of smoking on the packs.

At the same time, the tobacco industry promotes these products most intensively and obviously places the greatest stake on them. If the tax exemption is granted, it will lead to a catastrophic increase in smoking, primarily at the expense of young people who are interested in stylish fashion gadgets.

Multibillion-dollar budget shortfalls will go into the pockets of war sponsors

According to the calculations of experts of the NGO “Life”, if a 20% tax preference for HTPs is created, the budget will lose more than UAH 18 billion in 2025-2028. Instead, this money will be earned by tobacco giants.

Let me remind you that British American Tobacco, Philip Morris International, and Japan Tobacco International supply HTPs to the Ukrainian tobacco market. The latter two companies did not leave Russia and in August 2023 were recognized by the NACP as international sponsors of the war. PMI and JTI are the largest taxpayers in Russia among multinational companies ($8 billion in 2022).

So, what should be done?

The Ukrainian budget needs money, and revenues from tobacco excise taxes are already included in the 2025 State Budget. Therefore, increasing tobacco excise taxes is definitely necessary. Moreover, €90 per 1,000 cigarettes is a requirement of the EU’s Directive 64.  

At the same time, half-hearted solutions that reflect the interests of war sponsors and negatively affect public health protection are entirely unacceptable. This is why the public is urging members of parliament to support amendments during the second reading that will eliminate the tax preference for heated tobacco products (HTPs). If not, the draft law №11090 should be sent back for further refinement in the relevant committee