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 company with the right to operate and may not be purchased from an illegal seller.

E-cigarette products must use a registered trademark and the packaging must comply with the regulations on labels and warnings.

Regulations for China vape retailers and wholesalers

Companies engaged in the wholesale and retail of vape products are subject to the same rules and criteria for registration as producers and manufacturers. That is, they must obtain and receive approval for a license to engage in the wholesale or retail of e-cigarette products from the STMA or get approval for a change in the business scope of the license if they are pivoting into wholesale or retail.

The criteria to receive a license are the same as those required to receive a license for production and manufacturing listed above, adjusted to apply to wholesale and retail.

Prohibitions on the sale and marketing of e-cigarettes

Qualified and licensed retailers are also required to purchase vape products from a local licensed wholesaler, and wholesalers are not permitted to sell e-cigarette products to unlicensed retailers.

The administrative measures prohibit retailers and wholesalers from holding events, such as exhibitions, forums, and expos, to promote e-cigarettes.

In addition, e-cigarette retailers may not be located in the vicinity of any primary school, secondary school, vocational school, or kindergarten. They are also not permitted to sell e-cigarette products to minors and must place a sign banning minors from purchasing e-cigarettes in a prominent place in the shop.

E-cigarette products can now also no longer be sold through vending machines or any other self-service mechanism. The transport of e-cigarette products will be monitored by the local tobacco administration departments. The department will also impose limits on the number of e-cigarette products that can be shipped and carried across borders, which will make it harder for small vendors to skirt regulations by having individuals personally transport or send products through the mail.

One of the major new additions to the administrative measures is the ban on the sale of flavored e-cigarettes. The administrative measures now prohibit the sale of e-cigarettes in any flavor other than tobacco and the sale of e-cigarettes that can have flavors added to them.

Prohibitions for advertising e-cigarette products

E-cigarette products cannot be advertised in media, public areas, public transport, or outdoor spaces. It is illegal to send any type of vape product advertisement to minors.

It is also prohibited to use advertisements and public service advertisements of other goods or services to promote the name, trademark, packaging, design, or other similar content related to electronic cigarettes. All public communications of e-cigarette manufacturers or sellers, such as store relocation notices, name changes, and recruitment ads must not contain the names, trademarks, packaging, design or similar content electronic related to the e-cigarettes.

It is also prohibited to hold exhibitions, forums, expositions, or other public promotional activities to promote any type of e-cigarette product.

Regulations for import and export

If a wholesaler wants to pivot to exports, it must update its license scope and get approval from the STMA.

All imported e-cigarette products can only be sold through the e-cigarette transaction platform. The imported products sold in China must also undergo a technical review and must use an approved trademark that has been registered in China.

The latest version of the administrative measures has slightly relaxed requirements for the production of vapes made for export only, having removed the requirement for such companies to register products and receive a production license from the STMA.

The new administrative measures, however, do stipulate that products made for export must meet the standards and regulations of the import company. If the import company does not have any relevant standards or regulations, then the products will be subject to China`s standards and regulations instead.

Companies engaged in e-cigarette-related production that have obtained a tobacco monopoly production license and are engaged in export business must carry out export filing on the e-cigarette transaction management platform.

Consumption tax

From November 1, 2022, e-cigarettes in China will be subject to consumption tax, and e-cigarettes will be added as a sub-item under tobacco on the list of tax items.

For the purposes of tax collection, the definition of e-cigarettes products is: [Electronic transmission systems used to generate aerosols for people to smoke, including pods, vaping equipment, and e-cigarette products sold in combination with pods and vaping equipment. Cartridges refer to e-cigarette components that contain atomized substances. Vaping equipment refers to electronic devices that atomize substances into inhalable aerosols."