Mexico’s legal cannabis market: Impact of Taxes

Mexico could shape up to be one of the main legal cannabis markets for the industry in the world, but the approach to taxation will have a huge impact on how much benefit the government derives from it. Here, we share our perspective on how we might strike a balance between maximizing revenue from the legal cannabis market for the country while still promoting responsible adult consumption.

Mexico could shape up to be a major legal cannabis market, if it manages to configure and establish an attractive and competitive market.

It is important to recognize that the fiscal configuration will shape how the market develops within the country. Below, we share our perspective on how we might strike a balance between maximizing revenue for the country and promoting responsible adult consumption.

Maximizing taxes up front, via legal cannabis market contraction

One of the main incentives for governments around the world to create a regulatory framework for the legal cannabis industry is the tax revenue that this industry generates.

An analysis by the Centro de Estudios de las Finanzas Públicas (Center for the Study of Public Finances) estimates that revenue fro legal cannabis would be 15,543 million pesos in STPS, 1,534 million pesos in VAT, and 1,628 million pesos in income tax. These estimates were made with the idea of maximizing revenue from the beginning of the opening of the industry by applying similar laws of comparable industries.

The consequence of this calculation method is that it does not contemplate the market adoption curve. That is, the basic principle that in order to receive the tax benefits you must first incentivize and grow the legal consumption base.

We can take as a reference more advanced legal cannabis markets on the road to legalization in which these factors have not been considered and have chosen to opt for very aggressive tax configurations throughout the supply chain.

Observing these legal cannabis markets we can infer that high tax collection results in channeling the consumer to the grey (illegal) market and ultimately results in a public health problem because the consumer is not incentivized to the certified and legal product.

Another consequence of this form of tax enforcement is that it has been shown that in markets where the price differential of the product between one market and another is very large, it becomes an incentive for the consumer to participate in the medicinal market by treating a non-existent condition.

In both situations, whether the consumer opts for the gray market or for unfounded participation in the medical cannabis market, the government loses significant tax revenues.

Incentivizing responsible legal use with tax policies

Understanding that opening a legal cannabis market is a process that requires time and education of the different participants in the supply chain, mainly consumers, we believe that the manner and timing in which the authority exercises its right to tax collection directly impacts its scope and the size of the legal cannabis market.

With this premise in mind, a proposal of staggered collection, with updates every two or three fiscal years, is more aligned with the intention of growing the legal cannabis market and establishing itself as the first choice for users in Mexico.

We note that the thought of maximizing taxes from the beginning without considering the effects that this will have results in less revenue for the government in the medium term.

The notion that in the beginning when the market is small the government wants to collect most of the taxes is not the most efficient strategy to achieve economies of scale and a world leading industry.

C) Tax collection, one more process for a start-up industry

It is important to conclude that in addition to the percentages assigned for IEPS, VAT, ISR, or some additional consideration, it is important to emphasize that when dealing with biomass and concentration percentages, the ways of calculating and categorizing the product also have a great impact on how the industry begins to develop.

Depending also on the government’s intention, there are mechanisms to scale the tax rate to the turnover levels of the companies. This results in support for SMEs, and extracts the most value from the corporates.

In our opinion, the important thing is to align interests and understand that the opening of an industry happens in stages, it makes sense that the fiscal objectives of a legal cannabis market are executed in the same way.

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(Featured image by Filip Gielda via Unsplash)

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First published in Entrepreneur, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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