Economic Policy Review ISSN 1313 - 0544

Some disputable points relating to the proposed excise duties on tobacco products

Author: Petar Ganev / 25.11.2022
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This week the Parliamentary Budget Committee adopted at first reading amendments to the tobacco excise duties. Essentially the amendments proposed by the Ministry of Finance provide for the establishment of an excise tax calendar for the period 2023-2026 laying down the increases of all tobacco excise duties – on cigarettes, fine-cut smoking tobacco, heated tobacco products and e-cigarettes. The latter are interesting as this is practically the first time that a proposal has been put forward for taxing e-cigarettes or more specifically the nicotine-containing e-liquids.

The increases of the tobacco excise duties do not come as a surprise. It has been almost five years since the last change in the tobacco excise duties and during this period the disposable income grew significantly despite the effects of the pandemic. This means that the affordability of tobacco products has improved and hence consumption has increased – the taxed cigarette volumes reached 15 billion sticks in 2021. When we add to that the anticipated revision of the Tobacco Excise Directive it becomes clear that defining a plan for the gradual increase of the excise duties in Bulgaria is undoubtedly necessary.

Throughout the years we have made and supported numerous proposals for the establishment of an excise tax calendar for all tobacco products. Such a calendar provides market stability and predictability by ensuring that there will be no sharp tax increases. In this case a gradual increase of the cigarette excise rates is proposed together with a gradual change of the excise structure towards increasing the specific component and decreasing the proportional one. Overall, this is a policy that IME supports as it provides for budget stability and ensures that excise revenues are less dependent on the pricing decisions of the companies.

It is however a great challenge for any excise calendar to not only be adopted by the majority in parliament but be adhered to over the entire period. An excise calendar that gets revised annually is pointless. Therefore, it is important that every proposal is clearly substantiated and that some kind of a balance is achieved for the main market players. Most probably the biggest controversy caused by the current proposal will be with regards to the excise structure for cigarettes. Beyond the structure it seems that the situation with the cigarettes is clear – the excise duty will be gradually raised by 4-5% per year and a subsequent increase in the price of cigarettes can be expected. A 10% increase of the excise duty on smoking tobacco is also proposed. This is somewhat expected given that the excise rates for the traditional smoking tobacco have not been changed in 10 years and hence the excise differential with the other tobacco products, especially cigarettes, has expanded.

The debate about the novel tobacco products – heated tobacco products and e-cigarettes – remains somewhat neglected even though the biggest changes are towards those products. We will not discuss in detail the e-cigarettes here, but the proposal provides for introducing excise duties on the nicotine-containing e-liquids. In general, this proposal is in line with the practice in other European countries – at least 13 EU countries apply such excise duties and some even tax e-liquids not containing nicotine. A rate of 9 eurocents per 1 ml of e-liquid is close to the minimal rates in neighbouring countries such as Greece and Romania. It is to be noted that the proposal plan is to double the rate by 2025 and thus it may be useful to review the plans of the other Member States as well as the new rules for taxing e-cigarettes proposed as part of the Directive's revision.

The proposed amendments regarding heated tobacco products are interesting since an asymmetrical excise increase is planned. As early as in 2023 an excise increase of 21% is envisaged followed by another increase of 17% in 2024, then 15% in 2025 and 5% in 2026. There are no compelling arguments as to why the increase is bigger than the increase for cigarettes or smoking tobacco or as to why it is necessary to start with a large increase as early as next year. In April 2022 IME released a detailed analysis of the evolution of the heated tobacco market in Europe and of the practices relating to the taxation of this type of products in each Member State.

IME's report revealed that the taxation of heated tobacco products in Bulgaria was in line with the common practice in Europe. A separate excise category was created for the heated tobacco products with the tax base being established based on the tobacco content of the product and the rate being fully specific similarly to the rate for smoking tobacco. In this case the question is what the rate will be and how it compares to the tax rates for other tobacco products. The wide-spread practice in Europe is for the tax rates on the tobacco content of the heated tobacco products to be lower than the tax rate for cigarettes – based on tobacco content in the cigarettes. In Bulgaria the proportion is almost 1 to 1, i.e. the excise burden on the tobacco content of the heated tobacco products is approximately equal to the excise burden on the tobacco content of cigarettes.

Such a policy makes sense as on the one hand taxation is approximated based on tobacco content and on the other hand incentives are created for the new products. The excise differential in most European countries is wider, the tax rates for heated tobacco products are lower than those for cigarettes. If the current proposals for significant increases of the excise on heated tobacco products are adopted, Bulgaria will top the list in terms of tax burden on heated tobacco products vs cigarettes in Europe together with France and Spain and will diverge greatly from the neighbouring countries and the countries in Central and Eastern Europe. A much more balanced alternative would be to plan for tax increases for heated tobacco products in the excise calendar which are proportionate with the increases for cigarettes and smoking tobacco – within 5-10% annually. This would maintain the overall tobacco excise framework without "punishing" the new products. In addition, it will be more similar to the European practice which would most probably become part of the revised Directive on the tobacco excise structure and rates.