Finance Minister Arun Jaitley’s decision to hike the excise duty on cigarettes by 11-72 per cent is a clear signal that the Narendra Modi-led government is tough on tobacco.

Anti-smoking lobbies are confident that raising the specific tax on cigarettes as a percentage of their retail price would prompt a significant number of addicts to kick the butt and also dissuade youngsters from picking up the habit.

After all, there was a 9 per cent dip in the volume of cigarettes sold by major tobacco firms in 2013-14, such as ITC and Godfrey Phillips, on account of a 40-55 per cent rise in prices over the previous two years, which was due to steep upward revisions of excise duty by 22 per cent and 17 per cent, respectively. In addition, several State governments also hiked VAT rates on cigarettes, which range from 15 to 65 per cent, pushing up prices further.

So while the price of a Navy Cut is now ₹6.9, up from ₹4.9 in March 2013, the price of a king-size Gold Flake or a Classic has risen to ₹8.5 from ₹5.8. Despite this, excise collections from cigarettes were up 2 per cent in 2013-14, raising hopes that the hikes were having the desired effect. But while the impact is evident on paper, it doesn’t take into account the psyche of a tobacco user. Indeed, the tobacco industry has warned that hiking taxes on cigarettes does not reduce overall consumption in India, with consumers shifting to cheaper alternatives.

Out-of-box approach

What’s more, the sharp increase in prices has resulted in an increase in both inter-State and international smuggling, as well as sales of fake cigarettes.

The Tobacco Institute of India estimates that illegal trade in cigarettes now accounts for 19 per cent of the total industry, compared with 17 per cent two years ago. This translates into lost excise of approximately ₹6,000 crore for the government.

To boot, the tobacco industry has increased focus on the cheapest category of cigarettes, which measure less than 65-mm, knowing full well that the government is anxious not to penalise the poor workers that are their biggest consumers.

That’s why sub-65 mm cigarettes were spared an excise hike in 2013-14 even as more longer and more expensive varieties were subjected to an 18 per cent increase.

The Tobacco Institute estimates that sub-65 mm cigarette sales grew three-fold in 2013-14, accounting for 16 per cent of industry volumes in 2013-14, compared to 4 per cent in 2012-13.

With Jaitley raising taxes on these cigarettes as well this year, the biggest losers are likely to be the tobacco companies.

Legal cigarettes comprise only 12 per cent of tobacco consumption, down from 21 per cent three decades ago. But it’s obvious that overall consumption of tobacco products has increased in the same period.

An out-of-the-box approach is required if the government is indeed serious about curbing tobacco consumption.

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