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ESSE, the South Korean brand and MOND, a UAE brand, are the two brands most commonly smuggled into India. Photo credit: TII
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B. V. Javare Gowda, president, FAIFA, the Indian farmers association. Photo credit: FAIFA
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Illicit packs of international cigarette brands openly displayed for sale at an informal shop. Photo credit: TII
Waves of tax hikes have steadily exacerbated India’s illicit cigarette situation.
India is the second largest producer of tobacco in the world and a leading global exporter. The industry provides livelihoods to 45.7 million Indians, including farmers, farm laborers, and factory workers. Tobacco products contribute US$8.67 billion in annual tax revenues and US$1.45 billion in foreign exchange earnings from exports. Overall, the tobacco sector currently contributes an estimated US$204.8 billion to India’s economy annually. These may be impressive figures, but India has a unique pattern of tobacco consumption. Legal cigarettes account for only 10% of total tobacco consumption, the remaining 90% being made up of 29 other product types, including bidis, chewing tobacco, khaini, as well as, unfortunately, illicit cigarettes.
Dropping affordability of legal cigarettes promotes illicit market
Statistically speaking, India has one of the lowest per-capita cigarette consumption rates in the world, at just 90 sticks per annum. By comparison, the rate of China (the top ranking country) stands at 1,971 sticks per annum, while Russia (ranked second) clocks in at 1,542 sticks. And although India hosts 18% of the world’s population, it accounts for only 1.7% of global cigarette consumption. But why is that so?
The answer is relatively simple: excessively high taxes have made legal cigarettes unaffordable for most consumers. According to data released by the World Health Organization (WHO), cigarette taxes in India are at a staggering 5.71% of per-capita GDP. That effectively is 14 times higher than in the US; 7 times higher than Japan; 6 times higher than China and Germany; 5 times higher than Russia and Canada; 4 times higher than Pakistan; 3 times higher than Malaysia and Thailand; and more than 2 times higher even than the UK and Australia, two nations notorious for their exorbitant cigarette prices.
And just like in the UK and Australia, a drop in affordability over the years in India has led to the expansion of the illicit cigarette market at the expense of legal products. The prevalence of illicit cigarettes in India skyrocketed between 2011 and 2023 in particular. There apparently is a strong relationship between the unaffordability of legal cigarettes, illicit trade, and revenue collections. With increasing unaffordability, a large section of consumers shifted to tax-evading illicit cigarettes and other revenue-inefficient forms of tobacco consumption, like bidis or smokeless tobacco products which, on the basis of unit consumption, make up a multiple of that of legal cigarettes.
Illicit market causes huge tax revenue losses
The extremely low affordability of legal cigarettes in India encourages consumers to buy illicit cigarettes instead, which due to tax evasion are sold at significantly cheaper prices than legal products. According to Euromonitor International, India is the fourth largest illicit cigarette market in the world, with illicit products representing 26.1% of the market; or in other terms, almost one in every three cigarettes consumed in the country is illicit. Based on current tax rates, it is estimated that the government loses revenue of US$2.5 billion annually on illegal cigarettes. Apart from these gigantic losses, the illicit trade promotes various other direct consequences, including loss of business and livelihood in the value chain and exposing consumers to low-quality unregulated products. Taking advantage of the available tax arbitrage, illicit operators are specifically targeting India’s growing middle class, particularly youths, to whom they are offering appealing product ranges including flavor variants customized to Indian palates
Indian media outlets almost daily report seizures of illicit cigarettes, attesting to the fact that law enforcement authorities are trying to combat the problem. Yet it is an uphill battle. It has been observed that for every such seizure multiple consignments escape the surveillance net due to the sheer overwhelming volumes that are swamping the country. This is evidenced by the widespread – and quite open – availability of smuggled cigarettes from small stores and informal shops on every street corner around the entire country.
Excessive taxation one root cause for illicit product surge
For years, India’s legal cigarette industry has been burdened down by increasingly more punitive and discriminatory taxation.,“ […] Such inequitable tobacco taxation is leading to wide price differentials between legal cigarettes, other tobacco product varieties, and illicit cigarettes,” said Sharad Tandan, director of the Tobacco Institute of India (TII).
Although cigarettes represent only a 10% share of India’s overall tobacco consumption (and including illicit products!), this particular segment currently contributes around 80% of India’s tobacco tax revenues. However, consecutive waves of tax hikes did neither arrest nor decrease overall tobacco consumption, unlike what tobacco control and health authorities so often claim. Quite the contrary has happened. Overall consumption has in fact increased… though at the expense of legal cigarettes.
According to figures collated by TII from the USDA, the World Food Organization (FAO), the Indian Tobacco Board, and industry estimates, consumption in India of legal, duty-paid cigarettes slumped by 28% between 1981/82 and 2023/24. Over the same period, other forms of tobacco consumption, including illicit cigarettes, grew by about 70%. In other words: the unfavorable tobacco taxation policy has led to a shift in consumption from legal tax-paid cigarettes to illicit cigarettes and other tax-evaded products, defeating both revenue and social objectives of tobacco control.
Correlation between tax hikes and illicit product surges
India’s repeated tax increases indeed show a rather clear correlation with the increase in illicit cigarettes (see chart). During the period between 2012/13 to 2016/17, when excise duty rates increased by a CAGR of 15.7%, revenue collections only grew at a meagre CAGR of 4.7%. Also in 2017, tobacco tax on cigarettes was hiked up by 6%. Then, in July 2017, India introduced a goods and services tax (GST), imposing an average additional tax burden of 13% on legal cigarettes, though that rate went up to 19% in the case of king-sized cigarettes (>75mm in length). And it is particularly in this segment where numerous smuggled international brands are offered to consumers at prices far below those of local legal products. Thereafter, in the national budget of February 2020, National Calamity Contingent Duty (NCCD) rates on cigarettes were subjected to an overall weighted average increase by 13%, only to be hiked up again by 16% in the national budget of February 2023.
“These successive years of escalation in excise duty and other taxes have ensured a continued rise in tax arbitrage that favors smuggling syndicates, severely dents the legal cigarette industry, impacts tobacco farmers, and undermines the government’s revenue objectives,” said Tandan.
Illicit cigarettes negatively affect farmers’ livelihoods
India is the second largest tobacco producer in the world, as well as a leading global exporter. The fact alone that there is no shortage of export markets should put the country’s grassroots tobacco farmers at quite comfortable ease. But, amazingly, it doesn’t; and that apparently likewise can be attributed to the rising illicit cigarette problem. “Excessively high cigarette taxation has created a huge smuggled cigarette market in the country. Smuggled and illicit cigarettes now represent one fourth of the total Indian cigarette market,” explained B. V. Javare Gowda, president of FAIFA, the Federation of All India Farmer Associations*.
And, as national consumption figures for smuggled cigarettes have grown at the expense of legal cigarettes, the incomes and livelihoods of FCV tobacco farmers are getting hugely impacted because of the reduced offtake of domestic tobacco for cigarette manufacturing. “Smuggled cigarettes do not use domestically produced tobaccos, as they are manufactured in foreign countries. These contraband cigarettes originate from many countries, some of them being large producers of tobacco, such as China,” Gowda told Tobacco Asia.
According to FAIFA data, the growth in the illicit cigarette trade has resulted in a shrinkage of FCV crop production in India by a sharp 40%, from 316 million kg per annum in 2013/14 to 189 million kg per annum in 2021/22. That decline has caused the loss of around 240 million workdays of employment in FCV tobacco growing areas. And although around 50% of FCV is exported, the balance is typically used domestically. However, domestic cigarette production volumes have steadily declined over the years due to decreasing demand.
Also, FCV tobacco is primarily cultivated in semi-arid regions, where few other equally remunerative crops can be successfully grown.
“In the absence of viable remunerative crop alternatives, FCV tobacco farmers affected by a domestic drop in demand are faced with having to leave their fields fallow,” Gowda explained. And the high incidence of taxes on legal cigarettes is only acting as a luring incentive to illicit cigarette smugglers, making the livelihoods of local farmers ever more difficult.
*The Federation of All India Farmer Associations (FAIFA) is a non-profit organization that represents the causes of millions of farmers across India. FAIFA strives to be an advocate of farmers’ voices at regional, national and international levels and works towards ensuring the sustenance of their stable livelihoods.