Ukraine, in the context of a full-scale invasion, faces an acute shortage of budgetary resources. The shadowing of the economy, especially the markets for excisable goods, will increase tax revenues by tens of billions to the budget, which is extremely necessary to strengthen the defense capability of our state.
The full-scale invasion of Ukraine radically changed the vectors of fiscal policy, most notably, the need to finance the defense and security sector increased tenfold. It is necessary to increase tax revenues to the budget to adequately finance military expenditures. According to the Budget Declaration for 2025-2027 approved by the government, the main priority of tax policy is to ensure stable tax revenues to the budget.
The declaration, in addition to the projected increase in tax revenues by UAH 290 billion in 2025, UAH 336 billion in 2026 and UAH 339 billion in 2027, provides for additional fiscal packages that should increase budget revenues annually by UAH 340 billion. The budget declaration has been developed in accordance with the goals and objectives of tax policy reform defined by the National Revenue Strategy until 2030. The main priority of the strategy is a sustainable increase in budget revenues, closing existing opportunities for tax evasion, increasing the level of compliance with legislation and combating the shadow economy. Therefore, the shadowization of the economy, in particular the markets for excisable goods, is a top priority of state economic policy.
According to calculations by specialists from the Economic Expert Platform, as a result of the existence of the shadow market of excisable goods, the state lost 37-40 billion UAH in 2023 alone, with more than half of all budget losses coming from the tobacco market. At the end of last year, the budget received less, according to various estimates, from 20 to 23 billion UAH in taxes from the illegal production and circulation of cigarettes alone. Despite the general increase in revenues from the excise tax on tobacco products, irrecoverable losses from illegal cigarettes since the beginning of the full-scale invasion have exceeded UAH 50 billion!
Chairman of the Verkhovna Rada of Ukraine Committee on Finance, Tax and Customs Policy Daniil Getmantsev notes that tax evasion in wartime is identical to theft in the army. The Committee has repeatedly held open hearings on the dynamics of the shadow markets of excisable goods, initiated the creation of a Temporary Investigative Commission on Economic Security, which functioned in 2023, discussed optimal measures to combat smuggling, counterfeiting and other illegals, and issued appropriate instructions to law enforcement and regulatory authorities.
It should be noted that the effectiveness of the work of the Bureau of Economic Security (hereinafter referred to as BES) in the field of combating the illegal market of tobacco products has increased. BEB representatives focus on identifying the largest production facilities of counterfeit products and carry out appropriate investigative actions against possible violators of the law. During the first half of 2024, BEB detectives exposed illegal cigarette trade networks in almost all regions and the capital; stopped the sale of illegal products through Telegram channels.
The ongoing systematic work of government agencies in the field of combating illegal markets of excisable goods allows us to look into the future with restrained optimism. Authorities are increasingly focusing on countering the causes of the illicit tobacco market rather than combating its consequences. Further coordinated work of the BEB and other law enforcement agencies should be aimed at effectively combating the greatest root causes of the shadow market.
According to the latest KANTAR study, the level of illegal trade in tobacco products in Ukraine in April 2024 decreased to 18% from 25.7% in October 2023. The decrease in this indicator was achieved due to a decrease in the volume of products labeled Duty Free or intended for export , which is sold illegally in Ukraine, to a level of 5.7%. In October 2023, it was recorded - 12.9%, in March 2024 - 9.2%. Thus, the changes adopted by Parliament regarding restrictions on the placement and sale by Duty Free stores of tobacco products of both domestic and foreign production indicate their effectiveness. In modern conditions, there is a temporary ban on the production of tobacco products labeled Duty Free in Ukraine (for the period of martial law).
Despite the decrease in the volume of illegal cigarettes labeled Duty Free, the share of counterfeit products in Ukraine has increased (10.1%). This figure increased by 1.4 percentage points compared to March 2024. High profits from the production and sale of illegal cigarettes led to the reorientation of Duty Free “schemers” to the production of counterfeit goods. At the same time, 60% of counterfeits are counterfeits of brands of international companies, which are sold on the domestic market with fake excise stamps or without stamps at all; 40% of counterfeits are cigarettes with fake excise stamps, which indicate the name of the national manufacturer.
The price of a pack of cigarettes is a significant factor influencing consumer behavior. The minimum excise duty on a pack of cigarettes (20 pieces per pack) in Ukraine in 2024 is 50.3 UAH, and if we take into account the retail excise tax and VAT, the minimum amount of taxes per pack is 64 UAH. But the market is overflowing with the supply of cigarettes costing 60 UAH per pack. In kiosks, local shops, small shops, on the Internet, and in markets, they offer cigarettes at lower prices than a pack of cigarettes, even in the low price segment, which is officially produced and sold with all taxes paid.
This problem requires a prompt solution by identifying and tracking supply channels for counterfeits from the retail entity to distributors and manufacturers. According to KANTAR, the volume of the market for counterfeit cigarettes in Ukraine in 2024 is potentially more than 5.5 billion units. Issues of improving the system of state control over the production and circulation of cigarettes require increased attention. Identification of suppliers of smuggled raw materials and producers of billions of volumes of counterfeit cigarettes will help reduce losses in budget revenues and protect the population from consuming low-quality products.
It is necessary to introduce new tools for monitoring raw tobacco materials supplied for the production of cigarettes, as well as manufactured products that are transported outside production facilities. Given the high rates of counterfeit production, it is important to install video equipment on tobacco production lines, recently regulated at the legislative level, which will be able to transmit information to regulatory authorities in real time.
The creation and further operation of the Unified State Register of equipment for the preparation or processing of tobacco, raw tobacco, and industrial production of tobacco products is a balanced and correct step by the state in order to identify equipment for the production of tobacco products. It is important to speed up the public release of this information. By taking samples from these production lines, it will most likely be possible to identify the origin of cigarettes, and then regulatory authorities will use this information to counter the shadow market. The introduction of mandatory examination of tobacco products from registered equipment for their production is relevant and important. Taking into account the experience of specialists from the Kyiv Scientific Research Institute of Forensic Expertise and experts from the State Scientific Research Forensic Center of the Ministry of Internal Affairs of Ukraine in the field of conducting examinations to determine the origin of excisable products and the equipment on which they are manufactured, it is important to involve them in sampling and conducting examinations of tobacco products.
Cigarette smuggling in April 2024 increased to 2.2% of the total market (about 0.8 billion cigarettes) and reached record levels since the beginning of the full-scale invasion. Cigarette smuggling also goes in the opposite direction; illegal products also enter the EU market, which harms the image of our state. In connection with Ukraine receiving the status of a candidate for accession to the EU, the issue of identifying and prosecuting smuggling has reached a new level.
Among the activities of the National Revenue Strategy until 2030, important attention is paid to strengthening measures to combat smuggling and violations of customs rules (clause 5.2.3) and the measures necessary to establish criminal liability for smuggling of goods and excisable goods, as well as false declaration of goods (clause 5.3.3). In the EU countries that are neighbors of Ukraine, namely Poland, Romania, Hungary and Slovakia, there is criminal liability for smuggling. It is important to continue the reform of customs authorities in Ukraine, which is a condition for the further allocation of debt financing by international partners. Increasing the efficiency of customs operations using modern equipment (scanners and intelligent video monitoring systems) will minimize the flow of smuggled goods, in particular excise goods, across the border.
