Illegal Cigarette Trade

The combined effect of Government’s high and discriminatory taxation on cigarettes has impacted the legal cigarette industry, sub-optimized Government’s revenue collection and provided a huge fillip to the illegal cigarette trade in the country. The tax burden on Legal Cigarettes has more than trebled between 2012 and 2020 as a consequence of successive increases in  taxation.

Moreover, extreme regulations such as Pictorial Warnings provide further encouragement to the illegal cigarette trade in India, as illegal cigarettes do not comply with tobacco control regulation of the Government. Non-adherence of illegal cigarettes with regulations like pictorial warnings, lends an impression that they are safer alternatives to their legal counterpart.

As a consequence of high and discriminatory taxation on cigarettes and extreme tobacco control regulations in India, legal cigarettes have been on a continuous decline in the country while illegal cigarette trade has grown significantly. Both high taxation on cigarettes and extreme regulations produce counter-productive results. They do not reduce demand, but merely shift it from the legal to cheaper, regulation non-compliant illegal cigarettes (comprising international smuggled and domestically manufactured tax evaded cigarettes) of suspect quality, thereby undermining public health objectives of tobacco control.

The unfettered growth of the illegal trade impacts farmer incomes, livelihood of millions employed in the Industry and affects Government’s revenue collections.

High tax rates on Cigarettes provide a profitable arbitrage opportunity and incentive for tax evasion. Consequently, illegal trade in cigarettes in India has grown steadily over time. However, due to the particularly steep increases between 2012 and 2020, there has been a perceptible spurt in the growth of illegal cigarettes with its resulting impact on the Legal Cigarette Industry. According to Euromonitor International, a renowned global research organization, there has been a 55% growth in the illegal cigarette trade, increasing from 19.5 billion sticks in 2011 to 30.2 billion sticks in 2022, making India the 3rd largest illegal cigarette market in the world.

Importantly it is estimated that the Government loses Rs.18,500 crores per annum on account of illegal cigarette trade.

Apart from smuggled cigarettes, another aspect of illegal trade in cigarettes is the large and growing segment of low price domestic tax-evaded cigarettes.  Unscrupulous manufacturers have set up units without obtaining license taking advantage of the definition of ‘factory’ in the I(D&R) Act, 1951. Products from these ‘fly-by-night’ manufacturers are available in the market at Re.1 per stick, a price which is even lower than the applicable tax rates. Such low prices are possible only if stocks are removed clandestinely, without the payment of taxes on cigarettes.

Sharp increases in tax rate has rendered the legal cigarette industry without a counter to these Re.1 and Rs. 2 illegal cigarettes as the cheapest legal cigarette possible is now priced at Rs. 4 per stick. This has put the legal cigarette industry at a severe disadvantage while enabling a much higher arbitrage opportunity to the illegal operators.

The illegal trade in cigarettes in India, like the rest of the world, is controlled by anti-social, criminal elements in society and the 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 cigarette trade is that it undermines the tobacco control policies of the government by not adhering to tobacco regulations. Moreover, since contraband products do not use locally grown tobaccos, illegal trade impacts demand for domestic tobaccos thereby impacting the earnings and livelihood of tobacco farmers in the country.

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

The stability in taxes in the Union Budgets of 2021-22 & 2022-23, and the enforcement focus of the Government against illicit, has allowed the legal cigarette industry to recover small volumes from illicit trade. For the first time in over a decade, the growth momentum of illicit cigarettes in the country has been checked.

There is therefore, an urgent need for the Government to make systemic policy intervention with regard to high taxation and excessive regulation in order to adequately deal with the huge Illegal Trade problem.