The increase in NCCD announced in the Union Budget 2020-21 and the resulting escalation in cigarette taxation leading to higher tax arbitrage will serve as a huge incentive to illegal cigarette trade operators, who target India as a preferred destination for smuggled cigarettes.
The debilitating and relentless increases in tax rates in the years between 2012 and 2017 and the imposition of GST levy at a higher than Revenue Neutral Rate in July 2017 provided continued rise in tax arbitrage to smuggling syndicates severely undermining the legal cigarette industry and adversely impacting tobacco farmers and the revenue objective of the Government.
Illegal cigarettes have grown consistently in the country and now account for 1/4th of the Indian cigarette market. According to Euromonitor International India is now the 4th largest illegal cigarette market in the world with illicit cigarettes more than doubling from a level of 11.1 billion sticks in 2004 to 25.6 billion sticks in 2018, resulting in an annual Revenue loss of Rs 13,000 crores to the Government.
The increase in taxation over the years and the resultant drop in legal cigarettes has had a debilitating impact on the Indian FCV tobacco farmers who are under severe pressure due to the fall in demand for tobaccos grown by them as smuggled cigarettes do not use locally grown tobaccos.
NCCD was introduced in 2001 as a levy of a special surcharge on Central taxes for a limited period. However, while almost all Cesses and Surcharges were discontinued in the GST regime, levy of NCCD on tobacco products continues. TII had also requested the Government for the abolition of NCCD on the ground that this levy is against the principles of GST which, inter alia, seeks to eliminate cascading of taxes.
In the current economic environment the proposed increase announced in the Union Budget on NCCD will aggravate the pressure on the legal cigarette Industry, encourage illegal cigarette trade and adversely impact tobacco farmer earnings whose livelihood is intrinsically connected with the legal cigarette value-chain.
Enforcement machinery of the Government is seizing illegal cigarette consignments across India on almost a daily basis. The proposed tax increase will further strengthen the illicit supply chain and lead to long-term irreversible implications.
In the interest of the FCV tobacco farming community and the Legal Cigarette industry which is reeling under huge pressure we appeal to the Finance Minister to reconsider the proposal and withdraw the NCCD levy.