High taxes on cigarettes have given rise to an illegal industry and tobacco consumption shifting to cheaper non-cigarette forms, said the Tobacco Institute of India recently.
“Due to the punitive taxation on cigarettes since 2012-13, the legal cigarette industry in India has dropped from 110 billion sticks in 2011-12 to 95 billion sticks in 2014-15 and is expected to drop further in the current year,” said a statement issued by the Tobacco Institute of India.
Illegal cigarette trade comprising international smuggled and locally manufactured tax-evaded cigarettes accounts for as much as 1/5th of the cigarette industry in India. According a recent FICCI Study “Illicit Markets – A Threat to our National Interests” the overall market for illegal cigarettes in India is now estimated at 22.8% of the cigarette industry resulting in a huge revenue loss of more than Rs.9,000 crores (US$1.5 billion) to the national exchequer.
Citing an analysis done by the World Health Organisation in 2015, the Institute said that cigarette taxes (excise duty and state VAT) in India are amongst the highest in the world.
“In fact, cigarette taxes in India are 14 times higher than USA, nine times higher than Japan, seven times higher than China, five times higher than Australia, and three times higher than Malaysia and Pakistan,” said the statement.
Constant increase in duty rates has rendered the legal industry unable to counter the growing illegal filter cigarettes. This has put the legal cigarette industry at a severe disadvantage while enabling a much higher arbitrage opportunity to the illegal operators. Illegal cigarettes are readily available at marketplaces, paan shops, and hawkers’ stalls across the country. Indeed, cigarette sellers prefer to stock these brands as their low prices ensure higher trade margins.
As a result, illegal cigarette trade has almost doubled since 2004 in the country. According to Euromonitor International, a renowned global research organization, India is now the 4th largest illegal cigarette market in the world.
Another undesirable outcome of the growth of illegal trade is that it further undermines the tobacco control policies of the government and affects farmer earnings. Since contraband products do not use local tobaccos any increase in illegal trade will necessarily impact the livelihood of tobacco farmers in the country as demand for domestic tobaccos falls further.