TOBACCO EXCISE TAXES IN UKRAINE IN 1993-2001

Konstantin Krasovsky
Alcohol and Drug Information Centre
Kiev, Ukraine

The history of tobacco excise taxes in Ukraine can be divided into 3 periods:

1) the lowering of excise rates in order to promote manufacturing (1993-1995);

2) an increase of rates in order to increase revenues (1996-1999); and

3) tax stabilization (end of 1999-2001).

The policy of lowering excise taxes in 1993-1995 resulted in:

1) a significant decrease in state budget revenues, since the small increase of production didn’t compensate for losses caused by lowered excise rates;

2) an increase of the share of non-filter cigarettes in general production;

3) an increase of contraband sales.

The results of the four-year period of tax increases were the following:

1) the state budget income grew ten times in national currency, or four times in US dollars;

2) the share of non-filter cigarettes in general production decreased from 85% to 39%;

3) contraband sales decreased.

In November, 1999, the Ukrainian parliament finished the period of annual growth for the cigarettes excise rate and in December 2000 it decreased the non-filter cigarette excise tax.

The excise tax rates in 1996-1999 increased annually. Governmental revenue from excise tobacco taxation increased from 54 million hryvna (US$ 30 million) in 1996 to 522 million hryvna (about US$ 126 million) in 1999. After a decrease if excise taxes rates, the revenue in 2000 decreased to 446 million hryvna (US$ 82 million) despite the increase of cigarette production. In 2001, excise tobacco tax revenue was 583 million hryvna (US$ 108 million).

Tax rate cuts were made in order to fight against contraband, but there has been little signs of success. In 2001, the production of non-filter cigarettes was 15.2 billion pieces, which is 17% more than in 2000, but the revenue from the excise tax for non-filter cigarettes was 39% less.

According to the experience gained from the Ukrainian tax policy in 1993-2001, the most promising policy from the point of view of state budget revenues is to increase cigarette taxes annually.