China to impose consumption tax on e-cigarettes

China's finance ministry will impose a consumption tax on e-cigarettes from Nov 1, according to a notice published on Tuesday.

A tax rate of 36% will be placed on the production or import of e-cigarettes, while an 11% tax will be placed on the wholesale distribution of e-cigarettes.

The taxation policy will further entrench China's once-scattered e-cigarette industry into the state-backed tobacco monopoly, a major generator of tax revenue.

China has long been the world's largest producer of e-cigarettes, though consumption lags behind that of the US and other Western countries.

In 2018, inspired by the overseas success of the Juul, a bevy of venture-backed startups surfaced marketing e-cigarettes to domestic consumers.

The companies operated in a legal grey area, and eventually caught the attention of the State Tobacco Monopoly Administration (STMA), which regulates tobacco product sales.

In 2021, the STMA announced that it would require e-cigarette companies to obtain a licence in order to continue selling to consumers.

The requirements and accompanying regulations, which included banning the sale of flavoured e-cigarettes, triggered a wave of consolidation and closures in the sector, which was concentrated in the hardware manufacturing city of Shenzhen.

Shares in consumer brand Relx Technology Inc and white-label manufacturer Smoore International Holdings Inc suffered, though both companies went on to obtain the necessary licences in 2022.

Tobacco products remain a major revenue generator for Beijing, with cigarette sales generating roughly 5% of the central government's tax revenue each year.

That money has in part helped fund China's technology ambitions.

The STMA operates under China's Ministry of Industry and Information Technology. China Tobacco, STMA's commercial arm, is a shareholder in China's state-backed investment fund for the chip industry.