Fiscal Treatment of Smokeless Products

01

Why products are taxed

Certain goods and services such as fuel, alcohol, tobacco, motor vehicles, and gambling are often subject to additional indirect taxes beyond standard sales or value added taxes.

In the case of tobacco products, governments use excise taxes to: raise revenue, internalise externalities (i.e. capture perceived unpriced social costs), and pursue public‑health goals by reducing the affordability of harmful consumption.

These aims feature in contemporary tax policy and health strategies across jurisdictions and guidance from multilateral agencies, where higher tobacco taxes are framed as delivering health and fiscal “win‑wins” when well‑designed and enforced.

A recurrent tension is that very high tax rates can push consumers toward duty‑avoiding channels or untaxed substitutes, undermining revenues and public health goals, which is why many authorities emphasise simplicity, predictability, and enforcement capacity alongside excise policy changes.

02

Differential taxation can incentivise consumers to switch to potentially less hazardous products

If excise policy is intended to reflect harm and guide behaviour, it must acknowledge the basic scientific reality that not all nicotine products present equal risks.

Smokeless Products – such as Heated Products, Vapour Products and Oral Nicotine Pouches – have reduced-risk^*† profiles compared to combustible cigarettes. If governments wish for adult smokers to move away from combustibles, the tax system must make that choice visible in the simplest possible way: through price. Without providing a clear financial incentive, taxes cannot help facilitate consumer behavioural change^[11].

Many governments have therefore begun to design tax frameworks that tax Smokeless Products less than cigarettes while still tightening controls on youth access and non‑smoker uptake.

The UK’s approach, for example, of introducing a vaping duty while pledging to preserve the financial incentive for adult smokers to switch, is representative of this shift.

03

Global customs framework sets the tone for product differentiation

The 2022 revision of the World Customs Organization Harmonised System (HS2022) created discrete customs categories for modern nicotine products: heated tobacco consumables, e‑liquids and oral pouches^[12].

For the first time, the world’s customs authorities recognised non‑combusted products as a family distinct from traditional smoking articles.

The new taxonomy provides governments with a clear legal foundation for developing product specific excise definitions and duty systems that treat these categories on their own characteristics, rather than subsuming them within the same framework as traditional tobacco products.

04

Principles for the taxation of Smokeless Products

The fiscal treatment of Smokeless Products should be grounded in internationally recognised principles of effective taxation: simplicity, transparency, certainty, and efficiency.

These principles – originating in Adam Smith’s “Four Canons of Taxation” and reinforced by the OECD, IMF and World Bank – provide a coherent foundation for designing excise systems that are workable, proportionate and aligned to public‑health objectives^[13].

Embedding these principles in fiscal design ensures that taxation supports, rather than undermines, the goal of encouraging adult smokers, who would otherwise continue to smoke, to switch to Smokeless Products.

Clear product definitions aligned to Global Customs Framework

Incorporating HS2022 product definitions directly into excise legislation provides a coherent, internationally recognised framework for classification. This alignment reduces misclassification risk, strengthens coherence and enforcement across customs and domestic tax systems, and ensures that excise policy reflects the modern product landscape rather than legacy assumptions rooted in combustible tobacco.

Simple to administer

Category‑appropriate specific bases – per kilogram for heated tobacco consumables and pouches, per millilitre for e‑liquids – offer a future‑proofed structure capable of accommodating technological innovation. These bases are transparent for regulators, predictable for industry and resistant to manipulation, ensuring long‑term coherence as products evolve.

Tax consumables, not devices

Charging excise on consumables rather than devices avoids penalising innovation, reduces compliance complexity and aligns with the logic that taxation should fall on ongoing use rather than durable equipment. This mirrors the UK’s approach for vaping product duty‑stamping and e-liquid traceability.

Risk‑proportionate rates

Excise rates should reflect comparative risk: combustible tobacco – the most harmful nicotine delivery method – should bear the highest taxes. Smokeless Products, with lower risk profiles, should be taxed at meaningfully lower rates to maintain incentives for adult smokers who would otherwise continue to smoke to switch while safeguarding youth^[11].

Predictability and sequencing with enforcement

Use moderate, predictable trajectories and sequence enforcement capacity with policy changes to avoid unintended shifts to illicit markets that can erode both revenue and public health outcomes.