The state of affairs with the taxation of excise goods in Ukraine, such as fuel, tobacco and alcohol, continues to be the center of attention of experts and authorities. Oleg Getman, coordinator of expert groups of the Economic Expert Platform and associate expert of CASE Ukraine, examines the reasons why the government could not effectively curb the shadow market of 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 the military levy. However, non-payment of taxes as a result of various schemes is estimated at 300 billion hryvnias annually. Only "gray" schemes in the field of excise goods lead to budget losses of approximately 40 billion hryvnias per year.
According to analytical centers, trends in the market of excise goods in 2023 and the first quarter of 2024 showed different directions regarding the dynamics of the shadow share. For example, in the oil and gas industry, there was a downward trend in the shadow share from 30% in 2020 to 13% in 2023, but it increased again to 18% in the first quarter of 2024. In the tobacco industry, the growth of the shadow share occurred from 6% in 2020 to 19% in 2023. For alcohol, the shadow share fell to 38% in 2023, but rose again to 41% in the first quarter of 2024.
The general picture shows that the market of excise goods has undergone significant changes, which requires careful analysis and effective control measures by the authorities.
On the fuel market in Ukraine, there is a constant struggle of law enforcement and control bodies with "schemes" of tax minimization, which has had variable success in recent years. During 2023, the Temporary Investigative Commission on Economic Security was particularly active, which made a significant contribution to reducing the shadow on the fuel market. As a result of her work, amendments were made to the legislation and quarterly monitoring of the tax burden on producers of excise goods on behalf of the BEB, the Police and the DPS.
In 2024, the Committee on Finance, Tax and Customs Policy actively engaged in minimizing schemes in the field of excise goods. The last months were characterized by intense activity of inspectors and law enforcement agencies, which significantly complicated the work of "gray" and "black" schemes. As a result, the volume of legal sales of fuel 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 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 products (83% of all tobacco users), although the use of e-cigarettes (3.3%), TWS (3.0%) and hookah (2.6%) is also experiencing some expansion.
Analysis of the shadow share of the cigarette market showed that it averaged 19% over the year, with an abnormal 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.
In the first quarter of 2024, a significant decrease in the level of illegal trade in tobacco products was observed in Ukraine, according to data from the research company Kantar. In general, the share of illegal products amounted to 19.1%, which is the result of a decrease in both the share of counterfeit products (to 8.7%), and products marked 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%), Khmelnytska (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 the schemes in this field, significant changes were made to the legislation and appropriate instructions were given to law enforcement and control bodies. So far, it has been possible to keep the shadow level within 20%, but a significant reduction of the shadow economy has not yet been achieved.
In the field of alcoholic products, data from the World Health Organization (WHO) and information on tax revenues by year and the use of alcohol 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 averaging 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 the excise industries remains significant, which leads to large losses for the state budget - 37-40 billion hryvnias in 2023.
In order to effectively overcome tax minimization schemes, a systemic change is needed, which is based on the successful practice of the countries of the European Union: increasing the efficiency of the control bodies, reducing corruption, reforming the judicial system and creating inclusive institutions. Currently, there are no important structural changes in Ukraine that would ensure the quality of public administration at the level of European standards.
In general, the necessary changes to legislation and a systemic approach to combating the shadow economy can be an important step towards improving the country's financial stability and ensuring budget stability.
