A Positive Change in Czechia: A New Excise Tax Brings Significant Reduction in Hookah Tobacco Prices and Market Expansion. How Did It Happen?

In 2024, there was an incredible shift in my homeland, the Czech Republic. For years, hookah tobacco was very expensive in this country. The choice of brands was low, and the black market flourished. The main reason for this was the high excise duty. Globally, it’s unusual to see excise taxes lowered or adjusted to benefit both consumers and the state, but that’s exactly what happened here! Tobacco became cheaper, new brands appeared, and today I’ll explain how it happened and what drove the government to make this change.

What happend in Czechia?

First, the facts: Until 2024, hookah tobacco was part of the tax category “tobacco for smoking” with a rate of 3,300 CZK/kg (February 2024). Additionally, the entire weight of the tobacco, including the molasses, was taxed, not just the tobacco leaf content itself. Moreover, tobacco from third countries was subject to a 74,9% customs duty, with even higher rates for U.S. tobacco. To give an example, a 200g pack of DARKSIDE was sold to the end customer for 1,359 CZK incl. VAT, which is about 54 EUR – extreme! On the black market, a 250g pack could be found for 850–1,100 CZK (33–43 EUR), and with bulk purchases, it was even cheaper.

As a result, the black market flourished. A large part of the community also bought their tobacco in Germany due to the wider selection and lower prices. Legal importers and sellers suffered losses and bore the full regulatory burden. Despite this, hookah culture in Czechia was booming.

There have been several attempts to reduce or change the tax in this country, but the timing and political will were never right. The hookah community and businesses became apathetic, saying that nothing would ever change. In 2023, the Czech government needed to cut spending and increase revenue, which led to the creation of a legislative package known as the “consolidation package.” It affected almost every sector of the economy, including taxes, subsidies, etc. Was it the right time to try once again to change the tax on hookah tobacco? Part of the hookah industry decided it was.

I’m bringing you an interview with the key figures behind the initiative that successfully contributed to the change of the excise duty. These include:

• Aleš Neuberg – owner of the Prague-based hookah lounge Cloudroom,
• Allayar Allayarov – producer of the tobacco brand Theo, hereafter referred to as Ali,
• Vincenc Borovec – owner of the tobacco distribution and retail company Dobrý tabák,
• Legislative Advisor  – name withheld by request, hereafter referred to as LP.

Enjoy the interview, and be sure to check the conclusion, where I summarize what the excise tax change has brought!

What was the market situation for hookah tobacco in Czechia in recent years, say from 2020 until the creation of its own tax category?

• Aleš: The legal market had a small selection of brands and flavors, and they were very expensive. On the other hand, the black market offered a wide selection at an affordable price.

• Ali: The market was in decline due to the increasing excise tax, with a lot of money flowing into black market.

• Vincenc: The rising excise tax, with a minimum annual increase of 10%, was increasingly destructive to the legal hookah tobacco market. It only helped the black market to grow.

• LP: As a consumer, I always followed the situation closely and was in contact with the business scene. The high tobacco prices made the situation far from ideal, forcing consumers to go abroad for cheaper and more varied brands.

Why was the illegal market so appealing to consumers, and why did it flourish?

• Aleš: The black market offered a wide selection of popular global hookah tobacco brands at reasonable prices. However, not everyone knew about it.

• Ali: Low prices and diverse options. Smugglers didn’t have to deal with the complicated process of legal importation, making it easier for them to succeed.

• Vincenc: The black market was appealing due to both its prices and the range of flavors, which were often restricted on the European market due to regulations like TPD.

• LP: Mainly due to high prices caused by taxes. Why would someone buy tobacco here officially when they could just take a short trip across the border and get more for less?

When and why did you decide to do something about the current situation, which was not ideal?

• Aleš: Helping the industry I work in was the primary objective. It was crucial to enable official importers to compete with the black market. This decision was made in early 2023.

• Ali: For me, it was after COVID because we knew the state needed money, and we knew how to help them in a way that would benefit both the state and the hookah community.

• Vincenc: I had been considering this since I started working in the tobacco industry. The turning point came in 2020 when I actively started to address this issue despite the pessimism from my colleagues and industrial professionals.

• LP: It will be a few years since I first learned how stupidly our system is set up. I thought to myself that if I ever had the chance to change something, I would try.

What were your goals, and what proved to be the most difficult obstacle to overcome?

• Aleš: To lower the price of legally distributed hookah tobacco and expand the range of available brands. The challenge was convincing the right people that by lowering the excise tax, the state would collect more revenue from sales.

• Ali: Convincing the government that hookah tobacco isn’t as harmful to health as cigarettes, especially since most studies available to the state were funded by companies like BAT or PMI.

• Vincenc: The goal was to lower the excise tax, which would, in turn, increase tax revenue by reducing the black market.

• LP: To get the taxation set up in a way that was consistent with logic. That is, either to reduce the tax or to tax only the real amount of tobacco inside the package. After all, it is nonsense to pay an extremely high tax on hookah tobacco from contents that are not actually tobacco at all and are not subject to excise duty.

How did you connect with the government, politicians, or legislators?

• Aleš: Through a friend who is a member of a political party.

• Ali: Through connections – we didn’t go straight to the Ministry of Finance.

• Vincenc: Close contacts.

• LP: I’d rather not answer that for several reasons.

What arguments did you use to support your claims?

• Aleš: Primarily, higher revenues from excise tax collection. We supported this with a simulation of potential figures and compared it to the current state. We also showed them examples from other countries.

• Ali: Revitalizing the market, which means more money for the state budget. In addition to excise duty, VAT is also collected.

• Vincenc: A precise calculation of the real tobacco consumption in Czechia, comparison of illegal and legal imports, and a tax revenue calculation based on lowering the excise tax.

• LP: We prepared an analysis that showed how much the state could actually earn if the tax was reduced. And that it’s not a small amount. At the moment, there’s simply no reason for anyone to go abroad when it’s cheaper at home.

How did you gather the necessary data to support your arguments? What did you focus on, and what did you find?

• Aleš: Through people in the Czech industry who are involved in the production, import and sale of tobacco. We discovered the huge difference between the amount of tobacco sold through official distribution and on the black market.

• Ali: For comparison, we obtained data on market volume, tobacco sales, and revenues from our German friends. We also used German state statistical websites. Information on harmfulness was gathered from unbiased studies on the harmful effects of hookah, which are the most up-to-date – after all, hookahs have changed over the past 10 years.

• Vincenc: We drew data from our own experience in this segment, through numerous contacts in the industry, and by using our own formula for calculation (lounge, e-shop, retail). We calculated the new tax rate and supplemented it with step-by-step calculations for political debate.

• LP: I have addressed this with both tobacco retailers and business owners. This combination was perfect to gather absolutely realistic figures of tobacco consumption in the country and compare them with how much is collected in taxes, i.e. how much is sold through the official market.

Did you have any cooperation with the hookah enthusiasts and industrial community or did you work incognito?

• Aleš: I communicated with people from the Czech hookah industry who are involved in tobacco. We didn’t reach out directly to the Czech hookah community.

• Ali: We got what we could from the state statistical offices. We estimated the number of hookah lounges a bit and relied on information from people respected in the community.

• Vincenc: Minimally, more incognito, everything came out just before approval. Then, other people, who had nothing to do with the process until the very end, started to piggyback on the sensation to gain visibility.

• LP: I dealt with Aleš Neuberg and Vincenc Borovec the most.

What was the result of your initiative? Please describe what you achieved and when this change came into effect.

• Aleš: The separate excise tax category for hookah tobacco. As a result, there has been a massive reduction in excise duty. It came into effect on March 1, 2024.

• Ali: Exactly as Aleš says.

• Vincenc: 01.04.2024? I don’t know exactly anymore, I think it was like that because they still managed to increase the excise duty and it always changes in March. I remember March was the weakest month for us since we started the company, so definitely the first of April! We achieved the creation of our own tax category of hookah tobacco and subsequently reduced the excise duty on that category.

• LP: I can’t say what direct impact our initiative had, but at that time, the consolidation package was being discussed, which aimed to consolidate public finances. And hundreds of millions more are always good for the budget.

How have tobacco prices changed after the new tax was implemented?

• Aleš: A lot, the final wholesale price for most brands is now equal to black market prices.

• Ali: Tobacco prices have dropped by at least a third.

• Vincenc: The price of tobacco has decreased by about 50%.

• LP: I must admit, I haven’t followed the market closely recently, so I’m not sure.

What has been the reaction of the hookah enthusiasts and industrial community to this change?

• Aleš: I’ve only received positive feedback, except for one opposition politician who negatively included it in her campaign. It seems to me that most businesses have got it right.

• Ali: Positive, people appreciate the lower prices and wider selection of tobacco. If this change hadn’t happened and we still had the Track ‘n Trace obligation, most of the legal market would no longer exist, and the black market would still thrive.

• Vincenc: I think mostly good, although I kept reading that tobacco shops would just increase their margins, etc. That the price wouldn’t actually change, but the excise tax would be reduced. You always hear a lot of funny things behind the scenes, but it’s mostly and mainly from people who usually know next to nothing about the subject.

• LP: The reactions have been very positive. There has been a change that the whole community has been calling for for a long time.

After a few months, unlike the government, you can at least roughly evaluate the impact that the separate excise tax category for hookah tobacco has brought. What do you notice? Are the changes mostly positive, or has it brought some negative effects as well?

• Aleš: I think I see only positive impacts, mainly in the form of a wide range of tobacco brands and flavours.

• Ali: Positive, increased competition may be negative for some in the industry, but for regular hookah smokers, it’s a paradise. As they say, “fortune favors the brave.”

• Vincenc: There are many new tobacco brands, importers, shops, etc. I think the market has filled with new brands, and now we have a real selection. Prices are really in line with nearby countries and the black market has definitely decreased. However, the market now faces the risk of price dumping and unfair competition between new and original importers. But this is typical market behavior that comes with such opportunities.

• LP: There are suddenly many more brands of tobacco available in the Czech Republic. I confess that I was a little hopeful that the change would be reflected in the prices of hookahs in lounges, but it hasn’t happened. However, the fact that it isn’t any more expensive is a plus in my book.

What changes, legislative or otherwise, would benefit the legal domestic hookah tobacco market and help it grow in the future?

• Aleš: The removal of the requirement for single-unit packaging of hookah tobacco in the HoReCa sector. From my perspective as the owner of Cloudroom, nothing else is needed.

• Ali: The repeal of the single-unit packaging law and allowing larger packages to be used multiple times in lounges. There is a simple system to calculate this. I have an idea!

• Vincenc: The removal of the requirement for selling single-unit packages of tobacco products in the tax territory, meaning the elimination of the ban on selling “individual portions” of hookah tobacco in lounges. Large tobacco packages must be repackaged into small single-use packages (“tobacco shots”), which creates an enormous amount of packaging waste and adds a great deal of work for distributors and hookah lounge owners.

• LP: One more thing needs to be fixed, and that’s the rule where every customer should technically buy their own package of tobacco at the establishment, open it themselves, and the lounge only rents them the hookah. It’s completely absurd and deserves to be changed.

The real change and its consequences

Hookah tobacco received its own tax category under excise duty with a rate of 594 CZK/kg (2024). The tax has been reduced by 82%! At the beginning of the article, I mentioned the example with a 200g package of DARKSIDE, so to complete it – the original price was 1,359 CZK, today’s price 899 CZK incl. VAT for end customers. Specifically here the price is 67% lower. 

The official recommendation from the government’s legislative proposal states: “The taxation of hookah tobacco is proposed to be adjusted so that a significant portion of purchases for consumption in the Czech Republic is not made abroad (solely due to high taxes).” And I would add to this that the purchases should not be made on the black market either. This change was passed as part of the mentioned consolidation package in the fall of 2023, effective from March 1, 2024.

Hookah enthusiasts and ordinary hookah smokers have felt the change in their wallets, as tobacco prices dropped to levels unseen for many years. They are on a par with black market prices, sometimes even better. The risk of buying counterfeits has disappeared, people can easily buy legal hookah tobacco from e-shops and retail stores. Both the amount of money coming into the state budget and the sales of tobacco have increased. This brought back individuals for whom tobacco had grown into an unaffordable luxury and revived the less dedicated members of the community.

Many lounges moved from the gray zone into the legal tobacco market, buying without issues and with invoices. They finally have a wide choice of tobacco, so the range of tobacco in lounges has grown. Unfortunately, the price of a hookah in a lounge hasn’t decreased, even though customers want it to.

The domestic tobacco manufacturers, Theo and Craftium, have better sales for their products and are also offering larger 200g packs, which previously didn’t sell as much due to the high prices. Like other market players, they have been affected by the Track ‘n Trace system since May 2024.

The real market competition between distributors has begun! As soon as global brands learned about the upcoming tax change, many renewed their interest in the Czech Republic and began arranging distribution here. Have the big, established distributors acquired them all? Not exactly, as a number of smaller, fresh and more aggressive distributors appeared on the scene, beginning to negotiate with brands, taking over distributions, and even importing whole new brands. Although there has been some hostility in the industrial community as a result, it is a common aspect of business. For the record, in 2023 we had about 16 legal tobacco brands in our market, today there are over 30!

The black market still exists, but it is significantly less prosperous. It will never disappear entirely. Thanks to it, over the last 15 years, the Czechs have discovered American, Russian, German, Turkish, and other global tobacco brands, a contribution that cannot be denied. And the state? Whether or not actual tax revenue has grown, the state will evaluate this in the next year. But as you can see, my international hookah friends, there is a lot that could be altered. Even the cost of tobacco.

Analyze your market, present the data to the legislators, calculate the real benefits of a tax reduction. Money is the main interest of governments. Make sure you are well-prepared and communicate with your elected representatives. Many are looking for an agenda to push. It requires good timing and being part of a larger package of legislative changes, so that it doesn’t stand out on its own – as it polarizes both politicians and society. Good luck!

————————————————————————————————————————

Jakub Kopáček, a Czech writer and hookah enthusiast, is the author of the hookah book Dýmkařská bichle and the largest Czech hookah blog – Dýmkařův koutek. Previous jury member and the co-host of Hookah Battle in Czechia. A skilled advisor in the hookah industry for both businesses and enthusiasts alike. Hundreds of them have passed through his hookah courses, lectures and consultations.

e-mail: info@dymkaruvkoutek.cz

social and content platforms: Facebook, Instagram, YouTube, Spotify

websites: www.dymkaruvkoutek.cz & www.dymkarskesluzby.cz