South Korea abandons tax hike on heated tobacco products

On April 17th, during a meeting in the South Korean National Assembly, the ruling party proposed implementing cigarette-like taxes on heated tobacco products. Two days after the South Korean Finance Minister hinted at a potential parliamentary hearing, on April 19th, the government abandoned its decision to tax heated tobacco products.

In a statement, the Ministry of Finance said, "The government has not currently considered raising tobacco taxes." Previously, the minister's remarks faced strong public opposition.

South Korea's cigarette tax is higher than that of HNB products.

In South Korea, the tax rate for regular cigarettes is higher than the tax rate for HNB pods because the government deems the former more harmful to health.

Each pack of cigarettes is subject to a tax of 3,323 Korean won (equivalent to 17.23 Chinese yuan), which includes:

The tobacco consumption tax is 1007 South Korean won (equivalent to 5.22 Chinese yuan), the education tax is 443 South Korean won (equivalent to 2.29 Chinese yuan), the consumption tax is 594 South Korean won (equivalent to 3.08 Chinese yuan), the value-added tax is 409 South Korean won (equivalent to 2.12 Chinese yuan), the health promotion fee is 841 South Korean won (equivalent to 4.36 Chinese yuan), the waste fee is 24.4 South Korean won (equivalent to 0.12 Chinese yuan), and 5 South Korean won is used to support tobacco farmers (equivalent to 0.026 Chinese yuan).

On the other hand, taxes of 3,004 Korean won (equivalent to 15.63 yuan) are imposed on HNB pods at a tax rate of 90.4% of the standard cigarette product tax rate.

The average price for regular tobacco products and HNB pods is around 4,500 South Korean won (approximately 23.34 Chinese yuan) per unit of consumption.

Cigarette tax reduced, while non-combustible tobacco products taxed increased.

The government's attempt to increase tax rates to boost tax revenue has resulted in public criticism. Data from South Korea's Ministry of Finance show that tax revenue in January and February this year amounted to KRW 54.2 trillion (approximately RMB 282 billion), a decrease of KRW 15.7 trillion (approximately RMB 81.7 billion) compared to the same period last year.

In the past few years, the taxes on tobacco products have also decreased. This is mainly because the sales of regular tobacco products have decreased, rather than an increase in sales of non-combustible tobacco products, which have replaced traditional cigarettes with higher tax rates.

Between 2020 and 2022, the number of tobacco products sold in South Korea increased from 3.59 billion to 3.63 billion, an increase of 1.1%. However, the total tax revenue from all tobacco products decreased from KRW 120 trillion to KRW 118 trillion.

From 2020 to 2022, the sales volume of non-combustible pods increased from 380 million to 540 million, while cigarette sales decreased from 3.2 billion to 3.09 billion packs.

Industry observers have pointed out that the government is unlikely to increase taxes on HNB products, particularly before the general election in April next year.

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South Korea has retreated from a potential tax increase on heated tobacco products.