With a GDP of US$1.4 trillion, India is the world’s second fastest growing economy with an annual GDP growth estimated at 8.5%. It is Asia’s third largest economy behind China (US$5.7 trillion) and Japan (US$5.4 trillion) and it has the world’s seventh largest foreign exchange reserves (US$300 billion). India exported products worth US$220 billion and imported goods valued at US$320 billion in 2010. The per capita income in 2010 was US$1,134.

Tobacco is an extremely important commercial crop in India. It is the world’s second largest producer of tobacco with FCV accounting for about half of the total crop. 

It is also the world’s second largest consumer of tobacco products, but the consumption patterns are both unique and fragmented thanks to historical preferences and a taxation system that penalizes cigarettes (15% of total market share) over other traditional tobacco products such as bidis, chewing tobaccos, snuff and shisha, which together account for the balance of 85%.

Tobacco provides a livelihood to 38 million people, and its economic contribution to India’s GNP is significant, both at the national level, where earnings of US$3.5 billion accounts for 10% of the government’s total income from excise revenues, and at the state level, where local taxes earn around US$1 billion annually. 

Cigarette consumption in India in 2010-11 reached 102 billion sticks, down from a peak of 109 billion sticks in 2006-07.

Fewer than 6% of the adult population smoke cigarettes, representing a very small constituent of tobacco users in the country. 

Despite accounting for just 15% of tobacco consumption, cigarettes contribute 75% of total tobacco tax revenues, a situation that continues to create difficulties for the growth of the segment.

Three major cigarette companies account for around 98% of legitimate domestic cigarette sales. But, as in other nations slapping high taxes on cigarettes, India has recently been forced to face the fact that an increasing number of illicit, tax-unpaid products are finding their way into the market.

Traditional products such as bidi and various forms of chewing tobacco, hookah, snuff, etc., are the predominant forms of tobacco consumption in India, with about 29% of the adult population (considered as being 15 years and older) consuming these products. Bidis outsell cigarettes by a factor of eight times. 

A large proportion of traditional tobacco products are sold unbranded or unpackaged. Manufacturing is largely unorganized and is highly fragmented. There are thousands of bidi and chewing tobacco manufacturing units, and this alone makes enforcement of and compliance to regulations and excise collection extremely difficult.

This goes a long way to explaining the discriminatory taxes applied to cigarettes. On a per kg basis, the tax on cigarettes is 15 times higher than on other tobacco products (US$38 against US$ 2.5/kg). Being in the organized sector, the legitimate cigarette manufacturers are always under close scrutiny, whereas manufacturers of traditional tobacco products are largely under the radar and are often not much more than extended family units. So a large percentage of other tobacco products escapes the tax net due to unorganized manufacturing dynamics.

India was amongst the earliest ratifiers of the FCTC, being the eighth country to sign up, and it is the stated policy of the health ministry to be in the forefront of global tobacco control regulations

A comprehensive tobacco control legislation The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COTPA) was implemented effective May 31, 2004.

COTPA encompasses a ban on smoking in public places like workspaces, railway stations, amusement centers, court buildings, hospitals and so on, a ban on advertising/sponsorship/promotion of tobacco products, a ban on the sale of tobacco products to and by persons below 18 years of age and a ban on the sale of tobacco products in an area within a radius of 100 yards of any educational institution. COPTA also mandates graphic health warnings (GHW) on packaging covering 40% of the principal display area of the front panel of the pack and the printing of nicotine and tar contents, along with the maximum permissible limits. This last provision of the Act, i.e. printing of nicotine and tar contents, has yet to be implemented. In order to improve implementation of COTPA the government is attempting to enhance coverage of its National Tobacco Control Program, the broad objectives of which include: setting up a National Tobacco Regulatory Authority; effective implementation of tobacco control legislation through the establishment of state and district tobacco control cells and building awareness about the ill-effects of tobacco through school health programs and mass media campaigns. It also plans to build up its capacities in testing labs and infrastructure for implementation. 

As in other countries, tobacco taxation is being used as a tool for tobacco control. Excise and state taxes on cigarettes have doubled over the last five years. States have increased VAT on cigarettes beyond the agreed rate of 12.5%. As a result of these increases the average VAT rate now stands at around 15%. So while Indians may be becoming more affluent, the price of cigarettes continues to be beyond the reach of most tobacco consumers,

The huge tax differential between cigarettes and other tobacco products continues to widen, resulting in a shift in consumption from cigarettes to cheaper tobacco products like bidis and chewing tobaccos. With cigarette taxes 15 times higher than other tobacco products, the tax incidence is dictating tobacco consumption as high taxes on cigarettes is driving a shift towards the consumption of cheaper, low revenue yielding products. Despite the government’s intentions to use tax increases to lower the incidence of tobacco use, the affordability of cheap substitutes is in fact helping growth in overall tobacco consumption. Cigarettes’ share of tobacco consumption has decreased from 21% in 1981/82 to less than 15% currently, effectively shrinking the tobacco tax base and affecting revenue collections

The high tax rates on cigarettes is also encouraging excise evasion. A large number of small manufacturing units are selling cigarettes at prices less than applicable taxes (excise duty/VAT). This activity gained momentum after steep duty rate increases on cigarettes in 2008/09 and 2010/11. Illegally cleared stocks account for around 10% of consumption, resulting in an estimated annual revenue loss of US$225 million. As is always the case when high taxes are introduced, the prime beneficiaries are organized criminal syndicates benefiting from the illegal trade of usually unregulated tobacco products to a willing public.

The government of India has launched a National Tobacco Control Program (NTCP) in 42 districts in 21 out of 29 states and has assigned the program a five-year budget of US$100 million. 

Meanwhile, the ministry of health has launched a pilot project for alternative tobacco crops in collaboration with the Central Tobacco Research Institute under the ministry of agriculture.

And in a move that has been ratified by India’s supreme court, the use of plastics for packaging smokeless tobacco such as gutkha and zarda has been banned from March 1, 2011.

Increased activism regarding tobacco control is supported by international agencies besides local NGOs, as it is in other Asian countries. The establishment of six laboratories in collaboration with the US Center for Disease Control (CDC) to test and measure tar and nicotine yields has been announced, and studies are being conducted by NGOs to recommend policy change, such as The Economics of Tobacco and Tobacco Taxation in India funded by Bloomberg Philanthropies and the Bill and Melinda Gates Foundation. 

The health ministry, supported by local international NGOs and the WHO is constantly ‘raising the bar’ on regulations without recognizing the important role that tobacco and the country’s unique pattern of tobacco consumption plays in India’s economy. 

“India’s tobacco control policies and regulations should be specifically tailored to Indian conditions.” according to an industry spokesperson. “They should not be based on a ‘one size fits all’ approach, as advocated by the WHO, which is based on a Western model.” 

To sum up, the fragmented and unorganized manufacture of traditional products makes tax and regulatory compliance difficult to implement. On the other hand, as the WHO and NGOs, often financed by foreign anti-smoking lobbies, seek tax measures to control tobacco consumption, the disproportionately high taxation on cigarettes is causing huge growth, not only in illicit trade, but also in overall tobacco consumption, as traditional tobacco products are either lightly taxed or escape taxation altogether.