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The Growford Institute believes that the high level of shadowing of the tobacco market in Ukraine is due to three main factors: low incomes, rapid increases in excise duties and the weak ability of the state to combat counterfeiting.

This was announced by Kostiantyn Shvabii, an expert from the Growford Institute, at a round table organized by the Growford Institute and the Gorshenin Institute. He is one of the co-authors of the study “Policy improvement in the field of excise taxation of tobacco products and combating their illegal production and circulation in Ukraine”.

“In our work we have formulated the following conclusions: the volumes of shadowing in the tobacco market are caused by two main factors: insufficient purchasing power of the population and a sharp rise in tax rates. And the main thing is the insufficient institutional capacity of the regulatory authorities, which are not able to adequately resist the distribution of counterfeit contraband products,” Shvabii said.

According to Kantar Ukraine, in 2021 the size of the shadow market for tobacco products reached its maximum in the last decade (15.9%) and continues to grow.

Shvabii said that high taxes not only caused the shadowing of the market, but also called into question the prospect of legal production of tobacco products.

“The tobacco industry is represented by the largest taxpayers, who generally provide revenues to the state budget – not only excise duty, but also VAT, personal income tax, corporate profit tax – up to 7% of the state budget. Today the main questions are a rapid growth of tax rates on tobacco products and a possibility of the cessation of the development of tobacco industry as dynamically as it was for last 20 years. This is 50,000 jobs, this is almost 30 years of operation in the Ukrainian market, this is almost 2 billion investments in the Ukrainian economy. Due to the rapid increase in the tax burden, there is a risk that international investors will no longer consider our market as promising,” Shvabii said.

According to him, in general, the state tax policy is characterized by a desire to shift taxes to ordinary and honest taxpayers.

“Ordinary in the sense that from 2001 to 2021 the personal income tax in GDP revenues has almost doubled, and corporate profit tax has decreased from 4.6% to 2.8% of GDP. The value added tax paid by all consumers of goods and services, which provides almost half of the state budget revenues, has increased in relative terms from 7% in the early 2000s to 10% in 2021. According to the calculations in the Draft Law for 2022 and the explanatory note to it, the share of VAT in GDP will be more than 10.5%. At the same time, the share of excise tax is growing from 1.3% of GDP to 3% in next year’s budget,” Shvabii said.