China`s Vape Industry: Consumption Tax to be Imposed from November 1
China`s vape industry has been hit with another round of legislation. The new measures build upon a decision to move the industry under the purview of the State Tobacco Monopoly Administration and regulate e-cigarettes/vape products as tobacco products, which will put significant restraints on the industry catering to the domestic market. We discuss the finalized regulatory measures below, implemented from May 1, 2022. Technical standards approved by China`s market took effect on October 1, 2022. In addition, e-cigarettes will be subject to a consumption tax from November 1, 2022. October 25, 2022 – E-cigarettes will be subject to a consumption tax from November 1, 2022. China`s Ministry of Finance, General Administration of Customs, and State Tax Administration released the Annoucement on the collection of Consumption Tax on Electronic Cigarettes , which states that e-cigarette products will be subject to consumption tax and be added as a sub-item under the tobacco tax item list. From November 1, 2022, e-cigarettes will be subject to an ad valorem tax. The rate for the production and import of e-cigarettes will be 36 percent while the rate for wholesale will be 11 percent. Meanwhile, the announcement clarified that exports of e-cigarettes are eligible for the tax refund and exemption policy, signaling that China will still encourage the export of e-cigarettes. September 28 to 30, 2022 – China`s State Tobacco Monopoly Administration (STMA), the country`s top regulator of tobacco products, issued a notice on matters related to strengthening the regulation of e-cigarettes. The notice stressed the need for e-cigarette manufacturers, wholesalers, retailers, and other entities involved in the production or distribution of e-cigarettes to comply with new regulations released in late 2021 and early 2022. It included details of a dispute mechanism for companies that disagree with decisions on licensing made by the STMA during the transition period for companies to shift their business models to comply with regulations. In addition, on September 30, 2022, the STMA released two draft notices on limits for the number of e-cigarette products that can be carried or mailed across borders. The draft notices are open to public comment until October 30, 2022. April 25, 2022 – the STMA released a new set of trial policy measures for regulating the e-cigarette industry, titled Several Policies and Measures on Promoting the legalization and Standardization of the Electronic Cigarette Industry(Trial). (the [trial policy measures"). The trial policy measures build upon existing e-cigarette rules and regulations to standardize and regulate the development of the industry in order [to put the development of the e-cigarette industry on the track toward legalization and standardization". The new trial policy measures provide clarity on how the STMA intends to supervise and regulate the industry following the decision to regulate e-cigarettes as tobacco products and place them under the purview of the tobacco regulator. Jump to our updates on the latest trial policy measures here [anchor link]. April 8, 2022 – the State Administration for Market Regulation (SAMR) approved the [Electronic Cigarette" Mandatory National Standards, numbered GB 41700-2022, which among other requirements ban the sale of vapes of any flavor other than tobacco. The standards take effect from October 1, 2022, meaning that some flavored vape products can be sold in China up until this date, which is beyond the initial date of May 1 stipulated in the latest administrative measures regulating the market. The document also sets a wide range of other technical standards, including permitted ingredients and additives, nicotine levels, testing and safety standards, and accreditation. March 11, 2022 – the STMA, the country`s top regulator of tobacco products, released the finalized version of the Administrative Measures for E-Cigarettes, which lays out new regulations for the production, marketing, and sales of e-cigarettes in China. The latest version of the measures is an amendment to a previous draft that was released for public opinion in December 2021. Several provisions have been amended and new regulations added in the latest version. Among other new regulations, the measures now prohibit the sale of flavored e-cigarettes, a significant blow to the industry. The measures build upon a decision in 2021 to move the industry under the purview of the STMA and regulate e-cigarettes as a tobacco product. The measures will go into effect on May 1, 2022. Regulating China`s vape industry On November 26, 2021, China`s State Council announced it had amended the Regulations for the Implementation of the Tobacco Monopoly Law of China to include e-cigarettes and related products, stipulating that they are subject to the same regulations as tobacco products. This means vapes will now be subject to the same rules for licensing, production, sales, import/export, and taxation, among other rules, as traditional tobacco products. Then on December 2, 2021, China`s State Tobacco Monopoly Administration (STMA) released a draft of the Administrative Measures for E-Cigarettes (the `administrative measures`)`), a new set of administrative measures for governing the emerging China vape industry. These measures were later amended, and a final version was released on March 11, 2022. The administrative measures came into effect on May 1, 2022. However, as the [Electronic Cigarette" Mandatory National Standards [Standards number GB 41700-2022] (the `national e-cigarette standards") – that were released shortly after – only came into effect on October 1, 2022, a transition period for companies to shift their business models to comply with the regulations was implemented from May 1 to September 30, 2022. The administrative measures were based on the following Chinese laws governing the tobacco industries and the protection of minors: The Tobacco Monopoly Law of the People`s Republic of China, the Law of the People`s Republic of China on the Protection of Minors, and the Regulations for the Implementation of the Tobacco Monopoly Law of the People`s Republic of China. The administrative measures stipulate regulations for the production, sale, marketing, and import and export of e-cigarette products and nicotine for e-cigarettes. Perhaps one of the most significant rulings is the requirement for companies to process all transactions through an `e-cigarette transaction platfrom`, overseen by the STMA. Overview of China`s vape industry The China vape or e-cigarette industry has exploded in growth over the past couple of years, with early movers benefiting from unfettered access to the largest population of smokers in the world. The industry also has massive growth potential. According to a report from Chinese data analysis firm iiMedia Research, the penetration rate of e-cigarettes reached just 1.5 percent in 2021. This report notes that this is far behind countries such as the U.S., the U.K., and Japan, all of which have penetration rates above 30 percent. There is therefore significant room for expansion if companies are able to convince more of China`s 300 million or more smokers to wean off traditional tobacco. Regulations will now be the biggest hindrance to the industry`s potential. Until recently, e-cigarettes were not regulated as a tobacco product. Companies instead operated in a legal grey area that ultimately enabled it to grow into an RMB 8.3 billion (US$1.3 billion) industry. This decision, although perhaps not welcomed by the industry, will not come as a surprise; the government began deliberating it back in March 2021, and the pressure on lawmakers to sign off on the decision will only have become more acute as other laws aimed at enhancing the welfare of minors were released last summer. The issue of the protection of minors was likely also behind the decision at the end of 2019 to ban the online sale and advertising of e-cigarettes, as concerns rose over how accessible the youthfully marketed product was to minors. A look at China`s e-cigarette regulations The administrative measures are applicable to companies that engage in the production and operation of electronic cigarettes within China and cover all vape products, including vape cartridges, vape sets, and products sold as a combination of cartridges and sets. Heated tobacco products will be regulated as traditional cigarettes and not as e-cigarettes. Regulations for producers and manufacturers Under the administrative measures, local tobacco monopoly administrative departments are responsible for the monitoring and management of e-cigarettes in their jurisdiction. The local tobacco administrative departments are required to organize professional institutions to conduct technical review of e-cigarette products based on application materials, such as inspection and testing reports. They must also conduct regular and ad-hoc inspections of companies and individuals with licenses to sell vape products. License and registration Companies must receive approval and obtain a license from the tobacco monopoly administrative department of the State Council before they can establish business to manufacture e-cigarettes. The license must then be ratified and registered by the market supervision and management department. To be eligible for a production license, companies must meet the below criteria: Have an appropriate amount of funding for the production of e-cigarettes; Have the necessary technology, and equipment required for the production of e-cigarettes; Comply with the national e-cigarette industry policy requirements; and Other criteria stipulated by the STMA. Manufacturers must reapply for a license if their scope of business changes and obtain approval from the STMA if they intend to expand production capacity. The tobacco products used by manufacturers to produce e-cigarette products and nicotine must be purchased from a...
02 November-2022