As the COVID-19 pandemic continues to evolve and the economic crisis is deepened around the world, discussions about the role of the state in the post-pandemic period and the optimal course of fiscal policy are intensifying.
A consensus has emerged that the set of existing taxes and their structure should provide a compromise between the goals of economic growth and reduction of inequality.
It is recognized that income and profit taxes can effectively reduce the degree of inequality in society in contrast to consumption taxes, which are usually regressive.
IMF experts point out that most countries are now able to overcome the effects of the pandemic and promote economic growth through tax reforms.
In advanced and some emerging market economies, options for these reforms include more progressive personal income taxation, a broader value-added tax base, more and better use of carbon, property and inheritance taxes.
Developing countries should build their administrative capacity to enforce existing taxes; improve and simplify their VAT and excises, and better exploit taxes on property and pollution (Tax Policy for Inclusive Growth after the Pandemic)
In the October 2021 issue of the Fiscal Monitor, the general government deficit in emerging and middle-income countries in 2021 and 2022 is projected 6.6% and 5.8% of GDP, respectively.
These indicators significantly exceed the deficits of 2018 and 2019 and show the stimulating nature of fiscal policy during the crisis.
The ratios of general government revenues to GDP in this group of countries, according to the IMF, are expected to be 25.5% – 25.6% of GDP in 2021-2022, which is 2 percentage points lower than in 2018.
This, in turn, is a consequence of the active application of tax exemptions and lower tax rates during the crisis.
IMF experts point out that the priorities of fiscal policy in 2021 for most countries are: to continue to provide fiscal support to the population and business during the vaccination period and economic recovery after the crisis as well as to intensify efforts to achieve sustainable development goals.
In the context of global patterns of use of anti-crisis fiscal instruments and tax reforms, consumer tax policy in Ukraine seems ill-considered.
As noted above, since the beginning of the coronavirus crisis, many countries have practiced simplifying the design of consumer taxes (VAT and excises) and increasing the administrative capacity to collect them without raising tax rates.
Problems with VAT administration are widely known in Ukraine. In the last year and a half, some progress has been made in tackling them. However, problems with excise taxation have not yet been widely publicized.
Nevertheless, the excise tax is one of the important budget-forming taxes. In 2020, state budget revenues from excise tax amounted to UAH 138.3 billion, or 3.3% of GDP and 12.9% of total budget revenues.
The main categories of excisable goods in Ukraine are tobacco products, alcohol, alcoholic beverages, fuel, electricity and vehicles.
40% of revenues are provided by excise tax on tobacco and tobacco products, and 39% – by excise tax on fuel.
Since 2015, excise rates on tobacco and tobacco products have been constantly increasing. And the economic crisis of 2020-2021 did not influence this process in any way.
For instance, the minimum tax rate per 1 thousand cigarettes was raised from UAH 1,011.35 in the second half of 2019 to UAH 1,456.33 in 2021 and to UAH 1,747.6 in 2022.
In 2017, Law No. 2245-VIII on Amendments to the Tax Code and Certain Legislative Acts introduced a 7-year plan to increase excise tax on tobacco products to the EU level in accordance with the requirements of Council Directive 2011/64 /EU.
In particular, a specific rate of excise duty on tobacco products was projected to increase by a further 20% annually by 2025.
Significantly, the “reduction” of budget revenues from excise duties in 2018-2019 and the crisis of 2020-2021 did not encourage the state to reconsider this decision.
Fundamental economic theory recognizes that the main criteria of a tax system that promotes dynamic, inclusive and sustainable economic growth are: the criterion of fairness or obligation to pay tax liabilities for a certain category of economic entities; criterion of efficiency or minimization of economic deformations – minimal impact of taxes on economic behavior of business and distribution of economic resources; criterion of flexibility or availability of automatic stabilizers – the ability of taxes to smooth out fluctuations in the economic cycle.
Unfortunately, in Ukraine, too rapid increase in tax rates on tobacco products and the weakness of national regulatory authorities to counteract their illegal production and sale lead to a partial violation of these criteria.
According to Kantar TNS, in May 2021, the market share of the illegal market of tobacco products was 15.9%, which is 10 percentage points higher than in the same period last year.
High shadowing, in its turn, is associated with low purchasing power of the population and weak administrative possibilities of the state.
From January 2021, the specific rate of excise duty on cigarettes is UAH 1,088.64 per 1,000 sticks and the ad valorem rate is set at 12% of the retail price. The minimum tax liability is UAH 1,456.33, or EUR 44.13.
In dynamics, the minimum tax rate (in UAH per 1,000 sticks) increased from UAH 304.11 in 2015 to UAH 1,747.6 in 2022.
However, the dramatic rise in rates has little effect on budget revenues from excise taxes.
We calculated the real rates of excise tax on tobacco products and real revenues to the budget adjusted for inflation.
As a result, it was found that the specific rate of excise duty in real terms increased by 118% from 2015 to 2021, while real budget revenues from this tax increased by only 23% (see figure 1).
The approximate dependence of budget revenues on the excise tax rate is as follows:
Income = 0.0097 * Rate + 19.03 (R2 = 0.52)
That is, the relationship between these indicators is unstable, and the estimated coefficient of elasticity shows that an increase in the specific excise rate by UAH 100 raises budget revenues by UAH 0.97 billion (in 2015 prices).
The weak dependence of budget revenues on excise tax rates indicates their overestimated level and significant shadowing of the tobacco market.
Obviously, considering Ukraine’s chronic institutional problems, low incomes and the continuing COVID-19 crisis, it would be necessary to abandon the permanent increase in excise tax rates and focus on improving the system of control over the production and circulation of excisable goods.
The order of the Cabinet of Ministers of Ukraine No. 570-r of August 23, 2017 approved Strategy on counteraction against the illicit production and circulation of tobacco products for the period up to 2021.
The key objectives of the Strategy are to reduce the illicit production and circulation of tobacco products, as well as their illegal movement across the country’s customs border to improve the health and well-being of the population.
The order of the Cabinet of Ministers No. 128-r of January 29, 2020 approved the action plan for the implementation of the Strategy, which provides for:
- introduction of an automated control system for circulation of tobacco products based on a unique identifier for each packet of cigarettes;
- introduction of criminal liability for illegal movement of tobacco products across the customs border of Ukraine;
- strengthening of liability for offenses in this area, etc.
The timing for the implementation of these measures covered the period of II-IV quarters of 2020. However, even as of October 2021, most of them have not been taken.
In addition to these reasonable measures, the following should be implemented, as recommended by the WHO:
- mandatory licensing of all organizations engaged in manufacturing of tobacco products, manufacturing of equipment, transportation and primary processing of tobacco products;
- mandatory identification and verification of the counterparty with increased responsibility for the transfer of products or equipment used in the manufacturing of tobacco products to unlicensed market operators;
- affixing special markings on manufacturing equipment used in the manufacturing of tobacco products;
- introduction of automated control systems for activities of organizations engaged in the sale of tobacco and the manufacture, sale, storage, shipment of tobacco products (including export-import) or manufacturing equipment used in the manufacture of tobacco products.
Improving the institutional possibilities of national fiscal and law enforcement agencies, introducing new technologies in their work, modernizing risk identification and management tools, as well as introducing a prudent system of excise taxation, should gradually eliminate chronic problems in the tobacco and tobacco products market.
Scientific Director of the Growford Institute, Doctor of Economics Tetiana Bogdan for Business. Censor.