April 20, 2024

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[THE INVESTOR] Uncertainty continues to surround the taxes to be levied on heat-not-burn tobacco sticks sold in Korea, throwing consumer prices into question.

According to the National Assembly on on Aug. 24, floor discussions on the proposed amendment to raise consumption taxes on heat-not-burn tobacco sticks to the same level as traditional combustible cigarettes were pushed back to Aug. 28 by the parliamentary finance committee on Aug. 23.

 

Philip Morris' IQOS

The proposed amendment had reached bipartisan agreement the day before in the finance committee’s tax subcommittee. 

The committee’s chair, Rep. Cho Kyung-tae of the Liberty Korea Party, pushed back floor discussions of the amendment saying that the issue “needed further discussion.”

Under current legislation, individual consumption taxes on a 4,300-won ($3.82) pack of 20 heated tobacco sticks is 126 won, compared to 594 won for a 4,500-won pack of 20 combustible cigarettes.

Without set regulations on taxing heat-not-burn tobacco, cigarette manufacturers Philip Morris International and British American Tobacco had released heat-not-burn products this year with taxes equal to those levied on pipe tobacco.

Both companies have indicated that consumer prices of heat-not-burn sticks – PMI’s Heets for its IQOS system and BAT’s Neostiks for its Glo -- will inevitably go up with a tax hike. Industry speculation puts the increased price at above 5,000 won per pack.

Rumors of looming price hikes have led to some consumers buying large quantities of heat-not-burn sticks. 

“I’ve only had my e-cigarette for a few weeks,” said 35-year-old Lee Jun-hyung. “I want to stock up on the sticks so that I can use the e-cigarette for a while. I might switch back to regular cigarettes if the prices do go up.”

“As much as we want to maintain current prices, it will become unsustainable,” said an official with a tobacco company.

“One of the most important factors in consumer products is consistency,” said another official. “With heat-not-burn e-cigarettes, consumers buy the heating devices with the belief that they will be paying a certain price for sticks in the future. If prices fluctuate like this, we cannot expect our consumers to stay with us.”

In other countries, taxes on heat-not-burn  tobacco ranges from about 12-55 percent of taxes levied on combustible cigarettes, according to PMI. The lower taxes are usually based on the claimed lower health risks of heat-not-burn tobacco, which does not produce the toxins created during combustion. 

Although there have not yet been government studies confirming the lower health risks, both PMI and BAT have released in-house and independent research showing that heat-not-burn products’ vapor contains more than 90 percent fewer toxins than smoke from combustible cigarettes.

In Korea, lawmakers have argued that without definitive proof of lowered health risks, the taxes should be equal.

Another major consideration is the potential lost tax revenue that could arise from smokers switching over to IQOS and Glo. After a major tax hike that raised cigarette prices from 2,500 won to 4,500 won per pack in 2015, the government has seen a surge in tax revenue coming from cigarettes.

“Creating taxes that push consumer prices for heat-not-burn products above those of regular cigarettes is no different from discouraging smokers from switching over to a safer product,” said an official from a tobacco company. 

By Won Ho-jung/The Korea Herald (hjwon@heraldcorp.com)