Staying legal is just as hard as getting legal.

Hernando de Soto. "

Excisable goods in Ukraine - alcohol, fuel and tobacco - have always been among the leaders of the shadow economy. The unwillingness to pay growing excise taxes and the atypical profitability of the “gray” trade in these goods have recently provided significant incentives for businesses to work in the “shadow”, and for the state to increase the tax burden. Although the most explosive growth in taxes, primarily excise taxes, and, accordingly, the prices of alcohol, tobacco and fuel, very predictably led to the opposite result, namely: to more massive consumption of illegal products and further loss of state control over these groups of goods. All the more interesting is the question of how the situation changed during the war.

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The answer is in the latest analytical review "

The fuel market experienced a radical logistical transformation last year due to the loss and further replacement of main sources of supply (in 2021, 62% of diesel fuel and 50% of gasoline came from the Russian Federation and Belarus, now, in 2022-2023, the stake is made on Lithuania, Romania.

The state did not immediately, but refused to regulate prices and went towards the market, reducing taxes. From March 2022, there was an exemption from excises, and from September 2022, a preferential excise tax rate for gasoline and diesel fuel at the level of 100 euros / 1000 liters, for gas - 52 euros / 1000 liters, and the VAT rate for operations for the sale of fuel.

So it is not surprising that the calculations made by analytical centers based on the energy balance of Ukraine, the total consumption of fuel and the volume of its retail sales showed a drop in the size of the shadow market share.. The range of the “shadow” decreased in 2022 by 4 basis points to an estimated level of 11–18% (in 2021, the “shadow” reached 15–22%, in 2020 — 26%).

The tobacco industry, as a result of the war, was expected not only to stop or significantly reduce the volume of production at its beginning. So, by April 2022, the Kiev factory " The industry has huge problems with logistics, fuel shortages, power outages. And after the reorientation to import products and the loss of every fourth consumer, as well as due to a decrease in the population and other negative factors, the number of smokers of regular cigarettes decreased immediately by 25% (to 3.91 million people).

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This happened against the backdrop of an excessive focus in recent years of excise policy solely on maximizing tax revenues in the face of a low degree of its predictability/stability for business (more on this in the expert review of excise policy for 2016-2022). As a result, an extremely high level of the “shadow” — in 2021 it tripled, as evidenced by the calculations of analytical centers (to determine the level of the “shadow” and dynamics in the tobacco industry, a methodology was used that specialists from the international organization Healthy Initiatives successfully apply in assessing.

Moreover, the state during the war refused to cut taxes and, in order to avoid a severe deficit, was only able to give permission for the import of tobacco products in foreign-labeled packs.. This predictably led to an increase in the share of illegal tobacco products on the Ukrainian market in 2022 to a historical maximum of 20%, that is, at the end of 2022, every fifth pack of cigarettes on sale was illegal (Table. 1).

The only positive moment: after the increase in the summer of 2022, the share of illegal products to a record 21.9% in the fall of 2022, after a series of measures by regulatory authorities, it decreased to 18%. At the end of 2022, the shadow share of tobacco products is estimated at 20%.

Alcoholic products. It is believed that during the war, alcohol consumption increases significantly. But the market for alcoholic products in 2022 was significantly affected by the departure of a significant number of the population from Ukraine, the ban on the sale of alcohol in early April, temporary restrictions on the work of trade and catering establishments, disruption of logistics flows and a drop in the level of income of the population. These factors, according to experts, led to a certain increase in the level of unrecorded (shadow) consumption of alcoholic beverages up to 3.33 liters, which corresponds to a shadow market of 36%. Whereas the previous four years, the level of the “shadow” was declining: from 41% in 2018 to 34% in 2021 (table. 2).

If we sum up the impact of the war on the size of the “shadow” for three excisable markets (fuel, tobacco and alcohol), we will get the indicators shown in Table.

The conversion of the obtained data into tax losses of the 2022 budget allows us to state that in total they reached UAH 46–51 billion, including:.

alcohol market: UAH 11–12 billion;

oil products market: UAH 16–18 billion;

tobacco products market: UAH 19–21 billion.

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Clearly, the still significant informal economy during war needs to be minimized as quickly as possible.. The following measures can be considered as effective management decisions:.

- a policy document should appear at the state level, for example, it is necessary to adopt a new strategy in the field of combating the illicit production and circulation of tobacco products (the effect of the previous strategy approved by government order dated 23. 09. 2017 No. 570 ended back in 2021). Moreover, it is necessary to extend the new strategy to all excisable goods and contraband, as well as synchronize it with the National Economic Strategy for the period up to 2030 (approved by the Cabinet of Ministers of 03. 03. 2021 #179);

— it is necessary to intensify the implementation efforts of Ukraine, first of all, to transfer into Ukrainian legislation the requirements of key European directives (in particular, the new EU excise Directive 2020/262 of 19. 12. 2019, which replaced from February 13 with. Basic Directive 118) and ratify the Protocol to Eliminate Illicit Trade in Tobacco Products;

– it is necessary to strengthen the institutional viability of the relevant state bodies: restart the BEB as soon as possible (the adoption of bill No. 9080 by the Parliament), continue the technological re-equipment of the customs and tax services, organize interaction between law enforcement and regulatory authorities within Ukraine with a clear distribution of areas of responsibility (control over supply chains from. It is necessary to consider the issue of the impossibility of \;

— excise policy should become more predictable and moderate: adjustments agreed with business should be made to the current schedule for raising excise tax rates and abandoning their chaotic growth, in particular, introducing rates for various tobacco products depending on the degree of risk to health in accordance with EU practice.

We hope that the authorities will take into account the proposals of the expert community and will make the necessary changes to the legislation in the near future..

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