Raising excise rates on tobacco products has become an important element of Ukraine’s tax policy in recent years. It combines several objectives: strengthening fiscal stability, meeting international obligations in the process of EU approximation, and reducing the prevalence of smoking by limiting the affordability of tobacco products.
After the start of the full-scale war, the system of fixed rates in hryvnia lost its effectiveness, as inflation and currency depreciation eroded their real value. This also reduced predictability for both the state and businesses. The adoption in March 2025 of a law linking excise rates to the euro marked an important stage of reform. This decision reduces the impact of macroeconomic fluctuations and ensures Ukraine’s gradual alignment with the current EU minimum taxation standard.
At the same time, the debate on excise policy goes beyond fiscal matters and extends to issues of illicit market development, regulation of novel tobacco products, and the social consequences of smoking. This study provides a comprehensive assessment of the new excise policy in terms of its impact on public finances, the legal and illegal markets, and consumer behavior.
The research is based on a combination of statistical analysis, official data, and critical evaluation of sociological and industry surveys. To obtain official figures on revenues and excise stamp circulation, requests were sent to the State Tax Service. The size of the illicit market was assessed using the results of several parallel studies (Kantar, KPMG, and the Economic Expert Platform), which apply different methodologies and involve potential conflicts of interest, as some of these studies are funded by tobacco companies. To reduce the risk of distortions, a comparative approach and averaged values were used.
We also considered the methodology of surveys on smoking prevalence and structural changes in consumption. Their limitations were taken into account, recognizing that the high profitability of illicit production in Ukraine coincides with institutional challenges for agencies responsible for combating economic crimes. At the same time, reducing the illicit segment is a shared interest of both the state and legitimate businesses, since fair competition creates conditions for market development.
International experience shows that the illicit tobacco market is not a uniquely Ukrainian phenomenon. Even in EU countries – notably France and Ireland – smuggling and tax evasion remain pressing issues. Therefore, Ukraine’s tobacco control policy should be considered within a broader European context and requires a comprehensive approach that combines fiscal, law-enforcement, and public information measures.
Our analysis shows:
- Fiscal impact: in the first half of 2025, excise revenues recorded strong growth, with a 34.7% increase in Q2 2025, compared to Q2 2024, in nominal terms.
- Consumer behavior: despite regular increases in excise rates, the overall prevalence of smoking – including traditional cigarettes – is not declining and is rising particularly among women and young people. This is driven by the availability of cheaper products and the persistence of the illicit market.
- Illicit segment: illicit trade volumes remain high (around 20%). In 2025, following the excise hikes and the switch to euro-denominated rates, the illicit market did not expand but continued a gradual downward trend. However, low penalties, poor enforcement, and high profitability still sustain significant demand for illegal products.
- Novel products: heated tobacco products (HTPs) are taxed at lower rates and will remain about 20% cheaper than cigarettes until 2028. This asymmetry undermines the principle of tax equality and could negatively affect public health.
- Market trends: legal consumption has dropped by 30% since 2017, while companies are increasingly focusing on exports and expanding production of novel products.
Recommendations:
- Equalize excise rates for cigarettes and HTPs to prevent incentives for switching to lower-taxed products.
- Implement online monitoring and a Track&Trace system to strengthen control over tobacco circulation.
- Increase liability for illegal production and trade by making fines and criminal sanctions genuinely deterrent.
- Incorporate the social dimension of excise policy by supporting public awareness campaigns to reduce smoking, especially among women and youth.
This policy paper is prepared with financial support by The Vienna Institute for International Economic Studies (wiiw). wiw is a partner of the Bloomberg Philanthropies’ Initiative to Reduce Tobacco Use.
