Punitive taxation on cigarettes and extreme tobacco control regulations have resulted in a spike in smuggling of substandard cigarettes.

This has lead to the Government losing tax revenues on sale of cigarettes, as well as the emergence of greater health hazards among the users of cigarettes.

Moderate tax levels

“There is a big loss of revenue to the exchequer from smuggling of tobacco products,” says PC Jha, Adviser at FICCI Cascade (Committee Against Smuggling and Counterfeiting Activities Destroying Economy), and former Chairman of the Central Board of Excise and Customs (CBEC).

According to Jha, the Centre should keep tax rates on cigarettes at reasonable levels to avoid proliferation of counterfeit cigarettes.

Syed Mahmood Ahmad, Director, Tobacco Institute of India, says: “True, cigarette smoking is injurious and the Government, through graphic health warnings on cigarette packets, and also increased taxation, is making a huge effort to discourage people from smoking. Smuggled cigarettes do not carry these warnings and are of uncertain quality. But they come at a lower cost than domestically manufactured cigarettes, which makes them a hit with domestic smokers.” Illegal cigarettes account for a fifth of the cigarettes sold, and result in a ₹7,000-crore loss to the Exchequer, according to Ahmad.

Jha says, “After a certain point, high taxes lose their objective of squeezing demand. When regular smokers do not get genuine products at reasonable prices, they turn to fake products. As a result, the Government’s intention of reducing demand for tobacco products does not achieve its goals.” The legal cigarette’s share of total tobacco consumption in India has fallen from 21 per cent in 1981-82 to 12 per cent now, while the overall consumption has increased by a whopping 42 per cent, points out Ahmad.

According to industry figures, legal cigarettes contribute 85 per cent of the revenue mopped up from tobacco, despite its relatively small 12 per cent share of total tobacco consumption.

‘High taxation rates’

Not just smuggling from abroad, skewed and high taxation rates are giving rise to inter-State smuggling of cigarettes too, points out Jha.

Besides the Centre’s taxes, which is the same throughout the country, States too impose VAT on cigarettes, which varies from 12.5 per cent to over 60 per cent.

Because of this large gap in tax rates, cigarettes are smuggled from low-VAT States to high-VAT States.

Jha is hopeful the situation will change when the Goods and Service Tax is rolled out in 2016.

However, he adds a caveat – the form in which it will be rolled out with regard to tobacco products needs to be seen. Meanwhile, the Directorate of Revenue Intelligence (DRI) has been actively conducting raids and seizing counterfeit and smuggled cigarettes.

According to industry figures, it is estimated that during the financial year 2014-15, DRI impounded more than 89 million sticks valued at ₹71 crore. This compares with 12.3 million sticks worth about ₹11 crore impounded in the previous years.

comment COMMENT NOW