Illegal Cigarette Trade

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. The FICCI Study, ‘Illicit Markets – A Threat to our National Interests’ estimates the overall market for illegal cigarettes (comprising international smuggled and domestically manufactured tax-evaded cigarettes) in India at 20.2% of the Cigarette Industry having grown from 15.7% in 2010, resulting in a huge revenue loss of Rs.9,139 crores to the national exchequer. Read TII Handbook on Illegal Cigarette Trade

Extremely high tax rates and constantly increasing tax rates on Cigarettes provide a profitable opportunity for tax evasion by illegal trade in both international smuggled and domestic tax evaded cigarettes. The escalating excise duty burden on Legal Cigarettes has more than doubled in the last five years as a consequence of successive increases in Union Budgets since 2012-13. In addition, Cigarettes continue to attract very high rates of VAT and other state level taxes.

Further, extreme regulations such as Graphic Health Warnings provide further encouragement to the illegal cigarette trade in India, as illegal cigarettes do not comply with tobacco control regulation of the Government. 

According to Euromonitor International, a renowned global research organization, illegal cigarettes in India have more than doubled since 2004, making India the 4th largest illegal cigarette market in the world and clearly a preferred destination for international cigarette smugglers.

Source: Euromonitor International, 2016

 

The availability of International Smuggled Cigarettes has spread all over the country as retailers benefit enormously by pushing sales of these cigarettes due to higher trade margins as these Cigarettes are offered to retailers at extremely low prices compared to Indian manufacture. Illegal cigarettes are sold cheap due to tax evasion affording a huge arbitrage opportunity. Availability of these products spreads across urban as well as rural markets – in metros they are almost universally available. Smuggled Cigarettes are particularly popular among youth as they carry International Brand names and are cheaper than Indian brands. These smuggled cigarettes also do not carry the mandated pictorial warnings.

Another aspect of illegal trade in cigarettes is the large and growing segment of low price domestic tax-evaded cigarettes.

Unscrupulous manufacturers, lured by the huge arbitrage opportunity, have set up units by exploiting the provisions in the I(D&R) Act, 1951. Products from these units are available in the market at Re.1 per stick (filter cigarette) which is even lower than the applicable excise duty/VAT rates, only possible if taxes are evaded.

Constant increase in duty rates has rendered the legal industry unable to counter the growing illegal Re.1 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.

Illegal trade seriously undermines the social objectives of tobacco control through the availability of tobacco products at extremely low prices which are also of suspect quality, manufactured under unhygienic conditions.

By not adhering to Regulations such as the Graphic warnings, illegal cigarettes undermine the tobacco control policies of the Government and deliberately create the impression that these products are safer. In the absence of mandated warnings and other statutory requirements on packaging Illegal cigarettes are easily identifiable at selling outlets.

The illegal trade in cigarettes in India, like rest of the world, is controlled by anti-social, criminal elements in society. Growth in illegal trade implies availability of more funds with these elements to execute their unlawful activities against society. Internationally, it has been determined, for example recently by the US Department of Homeland Security, that profits from cigarette smuggling have been used to fund criminal and terrorist activities posing a huge threat to National Security.

Another undesirable outcome of the growth of illegal trade is that it would further undermine 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 also impact the livelihood of tobacco farmers in the country as demand for domestic tobaccos will reduce further.

The trade in illegal cigarettes in India is growing rapidly. This clearly demonstrates that extreme regulations and discriminatory taxation policy against cigarettes does not decrease overall tobacco consumption. It simply catalyzes the growth of the illegal cigarette trade, and compels people to switch to cheaper illegal cigarettes or low quality, cheaper forms of tobacco consumption.

There is therefore, an urgent need to have a moderated view on tobacco regulation, an equitable and moderate taxation policy and to create resistance and public awareness against illegal cigarette trade and for the Government to ensure stricter surveillance and harsher penalties against illegal operators.