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Cannabis Industry in Mexico: This is what taxes would be like and their effects on the market

Mexico is shaping up to be one of the main industry markets in the world, if we can configure and establish an attractive and competitive market.

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This article was translated from our Spanish edition. Opinions expressed by Entrepreneur contributors are their own.

By Diego Magallón, Canncura's financial advisor

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One of the main incentives that governments around the world have to create a regulatory framework for the cannabis industry is: The tax collection that this industry generates. Mexico is shaping up to be one of the main industry markets in the world , if we can configure and establish an attractive and competitive market.

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

A) Maximize taxes at the beginning, via the contraction of the legal market

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An analysis by the Center for Public Finance Studies estimates that the collection would be 15,543 million pesos in IEPS, 1,534 million in VAT and 1,628 million pesos in ISR, these estimates were made with the idea of maximizing income from the beginning of the openness 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 to receive tax benefits you must first encourage and grow the legal consumption base.

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

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

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

In both situations, whether the consumer opts for the gray market or for an unfounded participation in the medicinal market, the government loses significant tax revenue.

B) Incentive to responsible legal use with fiscal policies

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

Keeping this premise in mind, a staggered collection proposal with updates every two or three years is more aligned with the intention that the legal market grow and establish itself as the first option for users in Mexico.

We observe that the thought of maximizing taxes from the beginning without considering the effects that this will have results in lower revenues for the government in the medium term.

The notion that initially 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 nascent industry

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It is important to conclude that in addition to the percentages assigned to 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.

Also depending on the government's intention, there are mechanisms to scale the tax rate to the billing levels of companies, this results in support for SMEs, and extracts the highest value from corporate ones.

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