The state of affairs with the taxation of excisable goods in Ukraine, such as fuel, tobacco and alcohol, continues to be the focus of attention of experts and government agencies. Oleg Getman, coordinator of expert groups of the Economic Expert Platform and associate expert of CASE Ukraine, examines the reasons why the government has failed to effectively curb the shadow market for these goods and what can be done to minimize “gray” schemes.
Recently, the government has been considering proposals to increase tax rates, including VAT and military levies. However, tax evasion as a result of various schemes is estimated at 300 billion hryvnias annually. “Gray” schemes in the field of excisable goods alone result in budget losses of approximately 40 billion hryvnias per year.
According to analytical centers, trends in the excisable goods market in 2023 and the first quarter of 2024 showed different directions in terms of the dynamics of the shadow share. For example, in the oil and gas industry, there was a trend of decreasing the shadow share from 30% in 2020 to 13% in 2023, but in the first quarter of 2024 it increased again to 18%. In the tobacco industry, the shadow share increased from 6% in 2020 to 19% in 2023. As for alcoholic beverages, the shadow share decreased to 38% in 2023, but rose again to 41% in the first quarter of 2024.
The overall picture shows that the market for excisable goods has undergone significant changes, which requires careful analysis and effective control measures by government agencies.
In the fuel market in Ukraine, law enforcement and regulatory authorities are constantly fighting tax minimization “schemes”, which have had varying degrees of success in recent years. During 2023, the Temporary Investigative Commission on Economic Security was particularly active, making a significant contribution to reducing the shadow economy in the fuel market. The result of its work was amendments to the legislation and quarterly monitoring of the tax burden on producers of excisable products on behalf of the BEB, the Police and the State Tax Service.
In 2024, the Committee on Finance, Tax and Customs Policy actively engaged in minimizing schemes in the field of excisable goods. Recent months have been characterized by intensive activity of inspection and law enforcement agencies, which significantly complicated the work of “gray” and “black” schemes. As a result, the volume of legal fuel sales began to grow in March-May, which led to a decrease in the shadow share.
Regarding tobacco products, the methodology of the international organization Healthy Initiatives was used to determine the level of shadow trade in the industry. According to a study by the Kyiv International Institute of Sociology in 2023, 22.2% of the adult population of Ukraine are current cigarette smokers. Cigarettes remain the most popular tobacco product (83% of all tobacco consumers), although the use of electronic cigarettes (3.3%), TWEN (3.0%) and hookah (2.6%) is also experiencing some spread.
An analysis of the shadow share in the cigarette market showed that on average during the year it is 19%, with an anomalous figure of 23.5% in the fourth quarter of 2023. In general, budget losses from non-payment of taxes on tobacco products in 2023 are estimated at 18-20 billion hryvnias.
Ukraine saw a significant decline in the level of illegal tobacco trade in the first quarter of 2024, according to research company Kantar. Overall, the share of illegal products amounted to 19.1%, which is a result of a decrease in both the share of counterfeit products (to 8.7%) and products labeled Duty Free or intended for export but illegally sold in Ukraine (to 9.2%).
The leaders in the distribution of illegal products are six regions of Ukraine, where 67% of such products are sold: Dnipropetrovsk (18%), Odesa (13%), Kyiv and Kyiv region (11%), Kharkiv (10%), Khmelnytskyi (8%), Lviv (6%).
As in the case of fuel, the situation on the tobacco market is given special attention by the Verkhovna Rada Committee on Finance, Tax and Customs Policy and the Temporary Investigative Commission on Economic Security. Based on the results of the analysis of schemes in this area, significant changes were made to the legislation and appropriate instructions were given to law enforcement and regulatory bodies. So far, it has been possible to maintain the level of shadow trade within 20%, but a significant reduction in the shadow economy has not yet been achieved.
In the field of alcoholic beverages, data from the World Health Organization (WHO) and information on tax revenues by year and alcohol consumption by the population were used to assess the level of the shadow economy. In the first quarter of 2024, the total level of consumption of alcoholic beverages is estimated at 8.82 liters of pure ethyl alcohol per person. Shadow consumption is approximately 3.65 liters (which is 41% of the market), which leads to budget losses of an average of 7-8 billion hryvnias annually.
Despite the measures taken by the Verkhovna Rada and the Temporary Investigative Commission on Economic Security, the share of the shadow economy in excisable industries remains significant, leading to large losses for the state budget - 37-40 billion hryvnias in 2023.
To effectively overcome tax minimization schemes, a systemic change is needed, based on the successful practice of European Union countries: increasing the efficiency of regulatory bodies, reducing corruption, reforming the judicial system, and creating inclusive institutions. Currently, Ukraine lacks important structural changes that would ensure the quality of public administration at the level of European standards.
Overall, the necessary changes to the legislation and a systemic approach to combating the shadow economy could be an important step towards improving the country's financial stability and ensuring budget stability.
