It is extremely disappointing that the Union Budget 2016-17, on the back of 4 successive years of steep duty increases, has once again raised the excise duty rates on Cigarettes. The continuing discriminatory treatment of cigarettes is a matter of deep concern particularly due to the fact that Bidis, which are the most popularly consumed smoking tobacco product in India, especially in rural areas, have once again been spared with no increase in tax after 2012/13.
Moreover, nearly 70% of tobacco consumption in the country is largely produced in the unorganized sector which does not pay any form of tax either due to exemptions or evasion.
However, since 2012-13, the incidence of Excise Duty on cigarettes, at a per unit level, has gone up cumulatively by 98% which is exerting severe pressure on the legal cigarette industry even as illegal trade grows unabated. The increase of 10% in duty rates announced in this year’s Union Budget will take up the cumulative duty impact since 2012-13 to 118%.
The combined effect of Government’s persistently high and discriminatory Central and State level taxation on cigarettes has severely impacted the legal cigarette industry, sub-optimized Government’s revenue collection, encouraged shift to non-cigarette tobacco products, provided a huge fillip to illegal cigarette trade and adversely impacted the livelihood of tobacco farmers in the country.
The 2016/17 Duty increase is likely to put further pressure on the shrinking legal cigarette industry, accelerate the shift to cheaper low quality non-cigarette tobacco products and provide added arbitrage opportunity to illegal cigarette trade operators.
The duty increase is also a major blow to the livelihood of lakhs of FCV (cigarette) tobacco farmers, who have been facing unprecedented hardships due to a continuous drop in demand for their produce due to the shrinking domestic legal cigarette industry. The resulting loss in earnings of farmers and the acute financial distress faced by them has even led to unfortunate cases of suicides by farmers in the tobacco growing States of Andhra Pradesh, Telangana and Karnataka this year. With the 2016 excise duty increase and the expected drop in legal cigarettes further, the plight of cigarette tobacco farmers will only worsen with devastating effect on their livelihood.
It is unfortunate that the Government has once again got swayed by the anti-tobacco activists who have unrelentingly campaigned for higher taxes on cigarettes without any understanding of the socio-economic importance of tobacco in the country, the severe consequences of high and discriminatory taxation on the livelihood of millions that are dependent on tobacco and the growth of low quality non-cigarette forms of tobacco products.
The tobacco consumption pattern in India is unique in that only 11% of total tobacco is consumed in the form of legal Cigarettes. The balance 89% is consumed in other forms of tobacco consumption and illegal cigarettes. Legal Cigarettes contribute the majority 87% of the excise revenue from tobacco despite their very small share of total tobacco consumption in the country. The reason for this distorted pattern of revenue collections is that cigarettes are subjected to high and discriminatory rates of taxation compared to other tobacco products.
It is pertinent to note that steep increases in Excise Duty on cigarettes in recent years have resulted in widening the differential in Excise Duty rates (on a per kg. of tobacco basis) between cigarettes and other tobacco products from 28 times in 2005/06 to over 53 times currently.
As a result of the increasing disparity between legal cigarettes and other tobacco product forms, the share of cigarettes in total tobacco consumption has declined from 21% in 1981/82 to 11% currently leading to a sub-optimization of revenue from the tobacco sector and the unbridled promotion of cheaper non-cigarette tobacco products.
According to Euromonitor International, a renowned global research organization, illegal cigarettes have nearly doubled in last 10 years from 11.1 billion sticks in 2004 to 22.8 billion sticks in 2014, making India the 4th largest illegal cigarette market in the world. In fact, a recent FICCI Study, ‘Illicit Markets – A Threat to our National Interests’ estimates the overall market for illegal cigarettes in India at a significant 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.
The legal Cigarette industry has been representing the Government on the urgent need to reverse the consequences of a high & discriminatory taxation policy on cigarettes which has not only led to shrinkage of legal cigarette industry but also caused immense hardships to cigarette type tobacco farmers.