As of the end of July, China's regulatory system for electronic cigarettes has largely taken shape. One of the central components of this system is the development of a taxation policy for electronic cigarettes, which is currently still under progress. The Tobacco Bureau has suggested that it will collaborate with relevant departments to develop this policy, and is currently studying and working through the necessary procedures.
Industry experts widely believe that the implementation of taxes on e-cigarettes is only a matter of time. Ma Weimin, founder and CEO of GeWuXiaoFei, stated in an interview with the China Times that based on global trends in regulation, the e-cigarette industry will undoubtedly be subject to strong regulation and high taxes in the future.
Li Min, a tobacco engineering intermediate professional title and compliance expert, analyzed to a reporter from Hua Xia Times that the diversification and modernization of nicotine intake methods is a global trend. Countries such as Russia, Japan, the United States, and the United Kingdom that have imposed taxes on electronic cigarettes impose composite taxes on various tobacco products based on quantity and price, and the main regulatory measure is to gradually increase the quantity tax. From the taxation and market situations of tobacco products in overseas countries, the methods and rates of taxation have varying impacts.
Should cigarettes be included in the scope of consumption tax collection?
Under the new regulations, electronic cigarettes will be subject to the same regulations as traditional cigarettes and be sold through a specialized distribution system. However, there is currently debate within the industry as to whether electronic cigarettes will also be subject to consumer taxes, similar to traditional cigarettes.
According to a report by the Tobacco Economics Research Institute of the State Tobacco Monopoly Administration, titled "2018 China Tobacco Control Performance Report," China's comprehensive cigarette tax rate is 66.6%. Currently, the consumption tax on tobacco is classified into three categories: in the industrial production stage, Category A cigarettes are taxed at a rate of 56% plus 0.003 yuan per cigarette, while Category B cigarettes are taxed at a rate of 36% plus 0.003 yuan per cigarette. In the commercial wholesale stage, the tax rate is 11% plus 0.005 yuan per cigarette.
According to calculations by the fourth generation of wireless pods from Yuike, the current retail price per pod is 33 yuan. If taxed at the rate of a category B cigarette, which is 11% at the wholesale level and 36% at the production level, the incremental tax burden would be approximately 8.2 to 14.2 yuan, accounting for 25% to 43% of the original retail price.
In response to this, a reporter from China Times contacted the official of Yooz, and Yooz replied that they have not yet obtained any new information on the e-cigarette taxation policy. Currently, they are steadily advancing the work in accordance with the policy requirements.
Minsheng Securities has released a report stating that levying a consumption tax on new tobacco products is an inevitable trend. Drawing on Japan and South Korea for reference, China's future tax rate for new tobacco products may begin at a lower rate and gradually increase to approach that of traditional cigarettes. Currently, electronic cigarettes in China are only subject to value-added tax, with significantly lower tax rates than traditional cigarettes.
The electronic cigarette market has cooled down after the imposition of taxes.
According to Li Min, multiple countries have already implemented taxes on electronic cigarettes, although the tax rates may vary among each country.
The United States is the top global seller of electronic cigarettes. The government has yet to impose a uniform tax on e-cigarettes, but it is currently working on a plan to charge $0.0278 per milligram of nicotine content, which equates to about $1 per pod of 36 milligrams. Similar to traditional cigarettes, each state has its own regulations on taxing electronic cigarettes. California, for example, will start imposing a 12.5% ad valorem tax on e-cigarettes in 2021, while Texas currently has a 0% tax rate (though there will be licensing fees starting in 2021). Kentucky will impose a 15% ad valorem tax plus $1.50 per unit starting in 2021, while North Carolina has been charging a tax of $0.05 per milliliter of e-cigarette liquid since 2015. None of these states have established a specialized tax on tobacco products.
According to Li Min, in 2021, the electronic cigarette market in the United States exceeded $10.3 billion, which is about one-tenth of the $968 billion cigarette market. This is due to the fact that the electronic cigarette tax burden in various states is generally lower than that of traditional cigarettes.
Regarding the impact of tax rates on the market, Li Min added, "The China Tobacco Science and Education Network reported in April of last year, in an effort to bring new perspectives. The report suggested that raising tobacco taxes could reduce tobacco consumption, with the World Health Organization recommending a tax rate of 75% of its retail price.
Looking at other countries and regions, the European Union does not have an overall requirement for member states to uniformly impose a consumption tax on electronic cigarettes. However, many member states have included the "e-liquid" for electronic cigarettes in their consumption tax code, and impose a volume-based tax on it. The tax rates vary among countries, with Finland and Portugal having the highest tax rate at 0.3 euros/ml.
South Korea became the first country to impose a consumption tax on electronic cigarettes. In 2011, the country expanded the scope of tobacco consumption tax to include "electronic tobacco" and began with a tax rate of 400 South Korean won per milliliter of e-liquid. The tax has since gradually increased and currently stands at a total of 1,799 South Korean won per milliliter of e-liquid. South Korea also imposes a green fund tax of 24.4 South Korean won per 20 pods, which is equivalent to the tax rate for 20 traditional cigarettes.
The taxation of electronic cigarettes in Indonesia is stricter compared to traditional tobacco products. Electronic cigarettes are subject to a 57% consumption tax based on their retail price, while the average consumption tax rate for Indonesian tobacco products is 23%.
The electronic cigarette markets in these countries have generally experienced a decline in popularity after being subjected to taxation, and may require some time to recover. For example, in Indonesia, sales of electronic cigarette products saw a sharp increase in 2016, but growth slowed down after the implementation of electronic cigarette taxes on July 1, 2017.
The state of the electronic cigarette market in Indonesia.
Source: Euromonitor, Zhongtai Securities Research Institute, ECiglntelligence
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