Russian Government Proposes Significant Tax Increase on Heated Tobacco and E-Cigarettes

RTVI reports that the Russian Ministry of Finance has proposed a 33% increase in excise taxes on heated tobacco products (such as IQOS, Glo, and others) in 2023, rather than the current plan of 4%. Additionally, the tax rate for e-cigarettes and nicotine-containing liquids used in them may increase by 94%, instead of 6%. On November 17, the Federal Council discussed legislative changes at a roundtable specifically focused on the tobacco industry in Russia.

The regulations regarding consumption tax on the website of the Federal Tax Service of Russia. Image source: Federal Tax Service of Russia.

We are discussing the second reading of the draft federal budget for 2023 and amendments to the 2024-2025 plan, scheduled for November 22 in the State Duma. The original amendment proposed a 4% increase in the consumption tax for heated tobacco products (HNB), as well as an equal increase in the consumption tax for traditional cigarettes, and a 6% increase in the tax for nicotine-containing liquids." A participant at the roundtable told RTVI, but a revised amendment with new rates was introduced about two weeks ago.

The Ministry of Finance believes that raising the tobacco consumption tax on heated tobacco products containing nicotine by 94% and 33%, respectively, will increase federal budget revenues by 13 billion rubles and nearly 1 billion rubles. However, some market participants disagree with the ministry's proposal. Therefore, Sergey Slipchenko, Vice President of Affiliated Company Affairs for Philip Morris International in Russia (which produces Marlboro, Parliament cigarettes, and the Iqos tobacco heating system and other products), pointed out that the proposed increase in the consumption tax rate would result in a price increase of 17.4 rubles per pack of HNB sticks. He believes that such a sharp increase in price will not increase budget revenues but will instead have an impact on consumers and lead to an increase in the share of the illegal market.

Slipchenko has warned that the difference in consumption taxes between HNB products in Russia and many EAEU countries with a large amount of illegal tobacco products is already significant. For example, in Armenia, this tax is 79% lower, 77% lower in Kazakhstan, 44% lower in Belarus, and 28% lower in Kyrgyzstan. If the proposed amendment is passed, the situation will deteriorate further.

Therefore, a representative of the tobacco company proposed a more restrained increase in rates - a 15% increase in rates for heated tobacco and nicotine-containing products, and a 6% increase for regular cigarettes, instead of the planned 4%. In his opinion, this would lead to a moderate price increase (a 7.9% increase per pod), and would result in actual growth of federal budget revenue.

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