Regulation of Consumption of Sugary Soft Drinks with the Help of Excise Taxes.

Prozherina Viktoria Denisovna student, Department of Taxes and Tax Administration, Faculty of Taxes, Audit and Business Analysis; Financial University under the Government of the Russian Federation 49 Leningradsky Prospekt, Moscow, 125167, Russia viktoria.pr@list.ru

RelevanceSince Russia's integration into the system of international relations, it can be noted that the economic influence of Western countries, the trends coming from there and the propaganda of "fast food" have a strong influence on the diet of Russian society.

Thus, the market of sweet soft drinks has a steady upward trend: in 2021, the production of sweet and sweetened beverages on the Russian market increased by 34% compared to 2020.. Experts say that such a strong growth is associated not only with increased demand in the market, but also with an increase in both export sales of drinks containing sugar and sweeteners (the increase in exports of sugary drinks from the Russian Federation in 2021 amounted to 45.2% or 194.5 million liters) and the number of foreign producers. In addition, the supply of sugary drinks to Russia has increased: imports in 2021 increased by 12.7% compared to 2020, which in physical terms amounts to 20.6 million liters (Table 1).

Table 1 - Indicators of the sweet soft drinks market in Russia ^[1]

It is worth noting that many doctors and nutrition specialists are concerned about addictions to unhealthy habits among the population and negligent attitude to their diet ^[2]. At the same time, they are convinced that the development of diseases associated with digestive disorders, the endocrine system, as well as obesity and diabetes directly depend on the choice in favor of improper nutrition and the consumption of unhealthy foods, including drinks with high sugar content and artificial additives ^[3].

Concerns concern not only adults, children and adolescents are also at risk. So, for example, in the most "natural", according to the majority, packaged apple juice, up to 6.5 spoons of sugar per 250 ml glass. For comparison, the same glass of Coca-Cola contains up to 5.5 spoons. On average, 1 liter of any sweet soft drink contains at least 26 spoons of sugar.

It should be noted that it is impossible to unambiguously link the increase in the morbidity of the population with the increase in the consumption of sugary drinks, however, statistical data show a trend towards an increase in the morbidity of the Russian population (Table. 2), which coincides with the growth of the soft drinks market.

Table 2 - Dynamics of morbidity of the Russian population for some diseases ^[4]

Thus, the problem of the nation's health is increasing every year and requires a comprehensive approach to solving. For example, in recent years, one can notice the promotion of healthy eating among the media, who say that "smoking and drinking alcohol is no longer fashionable," but "sugar is the same white death as salt." This is associated with a decrease in cases of certain diseases in 2020, which, according to experts, develop due to malnutrition (Table 2).  

However, the market for sugary drinks is getting bigger, and the number of products sold is increasing. As of 2021, 274 organizations and 161 sole proprietors are engaged in the production of flavored and (or) sugar-added soft drinks in Russia (OKVED 2: 11.07.2) ^[5].

Another effective measure in the fight for the health of the population can be the idea of regulating the consumption of junk food with the help of government measures. Such measures include, among other things, tax legislation in terms of indirect taxation.

Historically, the introduction of indirect taxes allowed the state to regulate the internal processes of the economy (control over supply and demand), ensure a rapid inflow of funds to the budget and influence economic entities to achieve certain social goals. In this case, one of the social goals may be to increase the level of public health.

The idea of embedding taxes into the Russian tax system that limit the consumption of harmful products has been discussed more than once in government agencies. So at the end of 2021, the Ministry of Finance of Russia raised a serious question about the possibility of "working out the proposal of the Ministry of Health of Russia on the introduction of an excise tax on high-calorie soft drinks in order to limit the consumption of such products" ^[6]. At the moment, the excise tax on sugary soft drinks is already included in the main directions of tax policy for 2023-2025..

It should be noted that the proposal to introduce excise taxes on sweet soft drinks has also found coverage in Russian scientific circles. However, the opinion of scientists and economists on this issue is divided. One side believes that the introduction of excise taxes on "harmful beverages" can positively affect both the health of the population in terms of reducing the incidence of certain diseases by reducing the supply and demand for sugary soft drinks, and bring additional revenue to the budget ^{[14; 16]}. The other side defends its position against the introduction of such excise taxes, justifying this with the possibility of a reverse effect in the form of an increase in imports of similar products, a decrease in investment activity in this industry and the bankruptcy of the share of enterprises, as well as a drop in the collection of other taxes ^{[15; 19; 20]}. However, it is worth considering that some of the studies have outdated data and cannot be applied in modern realities, the other part - in its research does not take into account a number of features and consequences when introducing excise taxes on the group of goods in question.

In our opinion, if we study the world experience and competently approach the introduction of such an excise tax now, taking into account the possible consequences of its introduction into the tax system, it is possible to solve several problems at once:

• introduction of the population (in particular, children and youth) to a healthy diet;
• support for national manufacturers who produce high-quality products, but are experiencing difficulties due to competition from foreign multinational companies;
• replenishment of the federal budget of the Russian Federation.

MethodsDuring the research, logical methods (classification, generalization, analysis), as well as theoretical and comparative analyses were used.

In the complex, the use of these methods was aimed at the most objective study of the introduction of excise taxes to regulate the consumption of unhealthy sweet soft drinks in the tax system of the Russian Federation and the possible consequences after these innovations. 

The subject of the study is the excise tax system of the Russian Federation, as the most suitable for regulating the consumption of sugar-containing and sweetened beverages.

International experienceThe world community is ambivalent about the introduction of excise taxes on sugary soft drinks.

However, in the United States, some European and Asian countries, such an excise tax has existed for a long time for various reasons: one side sees this as an additional source for replenishing the budget, and the other – a regulator with which it is possible to limit the consumption of unhealthy products, in this case, sugar in beverages.

In particular, in the USA excise taxes on sugary carbonated drinks were introduced in two states – West Virginia (1951) and Arkansas (1992). The purpose of introducing such a tax is to reduce the average body weight of the population of the states and solve problems with obesity. However, the goal was not achieved: the body mass index of the population decreased only by tenths. This is often associated with the substitution effect: it is assumed that an increase in the price of sugar-containing beverages provokes the transition of some segments of the population to cheaper and no less high-calorie analogues.

Note that the substitution effect is the presumed cause. The real study was conducted by a group of scientists in 2013-2014.. The results showed that in the state of increased prices, participants purchased 10-13% less sweet water than at prices before the increase. At the same time, there was no significant impact on purchases in other beverage categories. This means that the higher price proved effective in reducing purchases and had no negative side effects, in particular, switching to similar products ^[7].

In the California city of Berkeley in 2014, residents themselves voted to introduce a tax on sugary soft drinks, including energy drinks and sweetened juices. The city became the only one in the state of California where such a tax was approved, despite the beliefs and provocations of the largest soda companies: over five years (2009-2014), Coca-Cola PepsiCo and Dr Pepper Snapple Group spent more than $ 100 million to finance a campaign against the introduction of such a tax in more than 20 cities USA.

It is noteworthy that starting in 2014, the largest manufacturers began to look for ways to modernize their drinks: Coca-Cola and PepsiCo promised to reduce the number of calories in drinks by 20% by 2025 by not only changing the composition, but also releasing new products that will not contain sugar at all (for example, bottled water) ^[8]. And earlier, in 2006, to mitigate criticism of their address, they agreed to concessions and stopped selling soda in all schools in the United States.

In Mexico, the introduction of a tax on sugary carbonated drinks at the end of 2013 pursued two goals at once – replenishing the budget and reducing the problem of high sugar consumption by the population, which has reached enormous proportions. Since Mexico is the second largest market for "soda", it was supposed to receive income from the tax in the amount of about $ 900 million per year. Also, according to estimates by the Organization for Economic Cooperation and Development and the World Health Organization in 2010, a similar strategy could save about 160,000 years of disability-adjusted life in Mexico annually.

Despite the fact that the idea of replenishing the budget was not fully implemented due to unexpectedly high administrative costs, the second goal was achieved and showed good results. On this occasion, the BMJ (British Scientific Journal) in its 2016 report stated that purchases of taxable beverages decreased more than expected (by an average of 4.2 liters less per year, or 6% of all purchases of taxable beverages), while purchases of non–taxable beverages - bottled water and sugar–free drinks - increased by 12.8 liters more than expected ^[9]. However, over time, the tax burden for consumers with a lower socio-economic status increased, since most of the tax (about 62%) fell on this category of the population. This may indicate the regressive nature of this excise tax. At the same time, as the BMJ notes, according to this logic, taxes on cigarettes and alcohol are also regressive, but are widely supported and used ^[10].

The Asia-Pacific region is engaged in an ambiguous struggle with sugar. Opinions were divided on "pros and cons": Indonesia abolished such a tax in 2004, while India, on the contrary, declares the need to introduce a 40% fee ^[11]. At this stage, the Philippines and Vietnam have experience in introducing an excise tax on sugary drinks in the region, but at a rate of 20% there is a negative impact on the collection of other taxes (VAT, income tax), which in total gives huge losses of budget revenues.

It is worth noting that in the above-mentioned countries, as well as in many European countries where there is also an excise tax on sugary drinks (Denmark, France, Belgium, Finland, Latvia, Hungary), the tax applies to any drinks and does not depend on the content of sugar and other sweeteners in them. The only country where the excise rate is set depending on the proportion of sugar in a drink was the United Kingdom, which conducted its own research in the field of sugar content in beverages and introduced a progressive excise rate only in 2018: the tax is levied on those drinks that contain 5 grams of sugar per 100 milliliters of liquid, the rate progresses depending on the amount sugar in 100 milliliters. This approach is more reasonable and preserves the economic position of many manufacturers of non-alcoholic sugar-containing beverages.  

Thus, as world experience shows, the results from the introduction of excise taxes on sugary drinks can be both positive (a decrease in demand for sugary soft drinks, an increase in demand for healthier drinks, the impact on producers of excisable goods and encouraging them to "modernize" drinks) and negative (high tax administration costs, an increase in tax burden for poorer segments of the population, reduction in the collection of other taxes). However, the problems faced by other countries demonstrate the need for a more comprehensive analysis and revision of some elements of the tax.

The expediency of the introduction and some elements of the excise tax on sweet soft drinksThere are many opinions about the expediency of introducing an excise tax on sugary soft drinks in Russia, including the opinion that sugar itself should be the object of taxation: such excises existed back in the Russian Empire and brought more revenue to the state budget than any other excise tax.

However, in modern conditions, preference should be given to the taxation of certain sugar-containing goods for a number of reasons.

Firstly, an increase in the price of sugar, as a consequence of its excise duty, will entail an increase in prices for all goods containing it, many of which are vital, cannot be made without sugar and do not cause serious harm to the health of the population. In addition, the rise in the price of sugar can damage many sectors of the economy, including confectionery, flour and even dairy industry. This will be especially acute during the economic crisis and will contribute to mass panic.

Secondly, many manufacturers of both non-alcoholic sugar-containing beverages and other unhealthy products replace sugar with sweeteners or even more harmful sweeteners (aspartame, saccharin, cyclamate and others). This means that taxation of sugar does not solve the problem of consumption of harmful products, but, on the contrary, can aggravate the situation if manufacturers massively begin to replace sugar in drinks with cheap analogues.

As mentioned earlier, since the end of 2021, the Ministry of Finance and other responsible ministries have been seriously engaged in working out a draft law on the introduction of an excise tax on sweet and sweetened soft drinks. The proposed bill considers two options for rates: a fixed rate, which is expressed in rubles and depends on the amount of sugar or sweeteners in the drink, as well as ad valorem, depending on the cost of the drink. To choose a more suitable rate for this excise tax, it is necessary to consider the advantages and disadvantages of each of the proposed types of rates (Table 3).

Table 3 - Advantages and disadvantages of solid and ad valorem types of bets

Source: compiled by the author.

Due to the "novelty" of the excise tax on sweet soft drinks for the Russian economy, it is necessary to carefully choose the tax rate: the introduction of any tax implies an increase in price and a decrease in demand for goods, which entails a decrease in supply and, probably, the withdrawal of some manufacturers from the market. This is also confirmed by foreign experience: if the tax burden of taxpayers is sharply increased through a high rate, a negative impact on the entire economy as a whole is possible.

According to a number of recent studies on the price elasticity of demand for soft drinks, with a 10% increase in price, demand will decrease by an average of 10% based on the average consumer (price elasticity = 1) ^[12]. Studies by another group of scientists have revealed a higher influence of the price of soft drinks on their demand: if the price of a drink increases by 10%, demand will decrease by 12% (price elasticity = 1.21) ^[13]. The difference in the results can be justified by the division of soft drinks into dietary and sweetened in the second study, however, for higher accuracy of calculations, the price elasticity of demand in the range from 1 to 1.21 should be taken into account.

Considering the above, in relation to sweet and sweetened soft drinks, it would be advisable to set a firm excise tax rate, which at the initial stage would not raise the price of the product too much and would not create a strong drop in supply and demand in the Russian soft drinks market during the economic crisis. It would also be fair to talk about the introduction of a progressive excise tax rate on the amount of sugar and sweeteners per 100 ml of a drink produced on the territory of the Russian Federation: the more sugar and (or) sweeteners in a drink, the more harm it causes to health.

Thus, we propose to set an excise tax rate of 5 rubles per liter of the drink if the sugar content in it is more than 5 grams per 100 ml of the drink, progressing to 8 rubles if the sugar content is 8 or more grams per 100 ml of the drink or the drink contains any amount of artificial sweeteners harmful to health. Artificial sweeteners in this case may include aspartame, sucralose, saccharin, corn syrup, agave and others. In order to avoid tax evasion, the most complete list of sweeteners should be approved with the participation of specialized bodies (the Ministry of Health and Rospotrebnadzor), which would take into account foreign experience and be constantly updated as new additives become available. At the same time, taking into account the current economic situation, in order to support Russian producers and simplify tax administration, it is proposed to set the excise tax rate for beverages imported into the territory of the Russian Federation at 8 rubles per liter of drink.

When setting rates of this size, the price will change by an average of 6-10% (based on the average price of 83 rubles per liter of sweet soft drink, including carbonated water, juices, nectars, fruit drinks, kvass and iced tea), which corresponds to a drop in market demand by 6-12%. The tax period will be 1 calendar month, similar to the excise tax on alcoholic beverages.

In addition, since the introduced excise tax has the ultimate goal of limiting sugar consumption and improving the health of the population, it is advisable to transfer the proceeds from its collection to the federal budget of the Russian Federation, from where they can be redirected to the budgets of the constituent entities of the Russian Federation to finance regional or state health programs. For example, such initiatives are currently being implemented through targeted funding from the federal budget within the framework of the program "Development of Healthcare" (approved by Government Decree No. 1640 of December 26, 2017) and the national project "Healthcare" from the Ministry of Health of the Russian Federation.

 Also, we note that the introduction of excise duty does not imply the withdrawal of companies producing sugary drinks from the market, and therefore there is a need to provide benefits for taxpayers. One of the options may be a benefit in the form of a rate of 0 rubles, for companies that plan to improve the composition of the drink and reduce the amount of sugar and sweeteners in it. We will demonstrate the effect of the benefit in the following example.

The company produces a drink that contains 6 grams of sugar or other sweeteners per 100 ml of the drink. When introducing an excise tax on sweet soft drinks, she will need to pay a tax at the rate of 5 rubles per liter of drink. However, it can reduce its tax liabilities if it plans to improve the quality of the drink and invest in the modernization of the product. In this case, the company can submit an application to the tax authority, to which it will attach a document confirming the start of the modernization process. For example, it may be funds invested in R&D. Thus, the company will receive a benefit in the form of a rate of 0 rubles for a period of 1 year.

At the end of the year, the company will need to report on the results. If suddenly the process started, but was interrupted, then the excise tax must be paid in full according to the previously submitted declarations.

Thus, the company is given the opportunity to reduce the amount of sugar in the drink by less than 5 grams per 100 ml of the drink per year and continue not to be an excise tax payer.

Summing up the above, maintaining an excise tax on non-alcoholic sugar-containing products and additional benefits for taxpayer companies can reduce the consumption of harmful beverages without severe damage to manufacturers. In addition, the introduction of this excise tax in the long term, while reducing the costs of tax administration, will lead to an increase in federal budget revenues of the Russian Federation.

Calculation of budget revenues from excise tax on sweet and sweetened soft drinks The calculations carried out are based on data from 2021 (Table.

1) and show the fiscal effect of the introduction of excise duty.

When calculating , we will take the following provisions:

1. The price elasticity of sweet soft drinks will be in the range from 1 to 1.2. At the same time, let's assume that with a decrease in demand, the supply will decrease by the same percentage points (6-12%).
2. According to marketing agencies, The Coca-Cola Corporation and PepsiCo. Inc. occupy a large share of the sweet soft drinks market (about 65% according to data for 2021), and their drinks contain an average of 10 grams of sugar per 100 ml of the drink. In this regard, taking into account the tendency to increase the content of sugar and sweeteners in drinks, let's assume: 72.5% of the market will pay tax at the rate of 8 rubles per liter of drink, 12.5% - at the rate of 5 rubles per liter of drink, 10% - will not pay tax because of the sugar content in the drink less than 5 grams per 100 ml, the remaining 5% took advantage of the benefit in the form of a rate of 0 rubles. Imported drinks will be taxed at the rate of 8 rubles per liter of drink.

Thus, the annual revenues of the federal budget, excluding expenses, can range from 58 to 62 billion rubles (Table 4). At the same time, one can count on net income in the range of 10 to 20 billion rubles and its gradual growth as administrative costs decrease and the economy "adapts" to the introduction of a new tax.

Appealing to the opponents, we note that the annual fiscal effect calculated by them varies from 11 to 33.3 billion rubles. ^{[14; 15; 16]}. However, these works do not provide for a progressive tax rate and tax benefits for taxpayers, which could simultaneously act as a support measure that contributes to a smoother adaptation of economic entities to the introduction of a new tax, and an incentive measure for manufacturers that allows them to switch to the production of less harmful beverages.

Table 4 - Fiscal effect of the introduction of excise tax on sweet and sweetened soft drinksIndicators for calculations

Source: compiled by the author.

ConclusionsThe results of the study showed that the introduction of an excise tax on sweet and sweetened soft drinks, taking into account some theoretical provisions and practical experience of foreign countries, can have a positive impact.

This is due to the fact that this tax can act, firstly, as a regulator of the supply and demand of beverages harmful to public health, secondly, as a measure of support for a domestic manufacturer that is ready to modernize its product and improve its composition, thirdly, as a source of replenishment of the federal budget, whose funds can be spent on financing health programs of various levels.

It is worth considering that the expenditure part in the form of tax administration in the first few years after the introduction may account for a large share of all income. This is due to the "novelty" of this excise tax for the tax system of the Russian Federation and its unpredictability for the country's economy. It is worth considering the possibility of adjusting the excise tax on sugary drinks to the mechanism of paying excise taxes on alcohol in order to reduce the expenditure part. 

Another negative aspect may be a decrease in revenue from other taxes due to a drop in supply and demand in the market of sugary drinks and the departure of some manufacturers. However, by including the excise tax in the value added tax base, losses can be minimized.

An important point that needs to be worked out when introducing an excise tax on sweet and sweetened beverages is to determine the most complete list of health-threatening sweeteners and sweeteners based on data from the Ministry of Health and Rospotrebnadzor and its regular updates, as well as approval of the procedure for disclosure of the composition on the packaging of the goods. Otherwise, tax evasion is possible in the form of replacing the usual sugars and sweeteners with more harmful ones that do not fall under the object of taxation.

In addition, it is possible to introduce benefits in the form of a reduced tax rate on sugar substitutes that do not harm health. Their list is also required for approval by the responsible ministries.

The introduction of an excise tax on sugar-containing beverages can reduce the consumption of harmful beverages by 6-12%, while bringing an annual income to the state in the form of 10-20 billion rubles.