High & Discriminatory Taxation On Cigarettes Has Led To Unabated Growth of Illegal Cigarettes and Revenue-inefficient Cheaper Tobacco Products
There has been extensive coverage in Media on a Study on Tobacco Taxes in India, jointly undertaken by ISID and PHFI with financial support provided by WHO. This Study covers the period 2006 to 2013 and was submitted to the WHO in March 2014.
The release of this Study in Media at this time and just before the Union Budget 2016/17 appears to be motivated and a deliberate attempt by anti-tobacco activists to misinform and influence Policy Makers on tobacco taxation by basing their recommendations on a study which is not only outdated but is also at variance with a more recent study released by WHO itself in 2015.
The recommendations made in the Study also overlook the undesirable consequences of high & discriminatory taxation on cigarettes, the objectives of tobacco control in the country, Government Revenues and the livelihood of millions of farmers and others that are dependent on tobacco.
It is therefore, important to provide a correct perspective on the tobacco taxation policy of the government and its consequences in order to clear the misconceptions that may arise amongst the policy makers and the general public on the issue.
Over the last 3½ years, the incidence of Central Excise Duty and State VAT on cigarettes, at a per unit level, has gone up cumulatively by 98% and 124% respectively which is exerting severe pressure on the legal cigarette industry even as illegal cigarettes grows unabated and the overall tobacco consumption continues to shift to cheaper non-cigarette tobacco forms.
As a result of punitive taxation on cigarettes since 2012/13 the legal cigarette industry in India has dropped from 110 Billion sticks in 2011/12 to 95 Billion sticks in 2014/15 and is expected to drop further in the current year.
An analysis of the data contained in the WHO Report on Tobacco Taxation, 2015 mentioned above reveals that at 6.5% of per capita GDP, Cigarette Taxes (Excise Duty & State VAT) in India are amongst the highest in the world. In fact, cigarette taxes in India are 14 times higher than USA, 9 times higher than Japan, 7 times higher than China, 5 times higher than Australia and 3 times higher than Malaysia and Pakistan.
The incidence of high taxes has made legal Cigarettes extremely unaffordable in India. The WHO Report of 2015, which measured affordability of Cigarettes as a proportion of GDP per capita required to purchase 100 packs of 20 cigarettes of the Most Sold Brand, has found affordability in India very low compared to other countries. In India this ratio is 10.8%, which is higher than most developed and developing countries (e.g. USA 1.14%, Russia 1.31%, Germany 1.55%, Canada 1.68%, China 2.14%, Australia 2.53%, UK 2.87%, Malaysia 3.4% and Pakistan 3.73%).
Further, it is evident from the WHO Report itself that prices in absolute PPP Dollar terms of Most Sold Brand (MSB) cigarettes in India at 4.50 are higher than Global Average 3.51 as well as average for middle income countries at 2.89 and low income countries at 2.03.
It is also important to mention that during the period 2008/09 and 2014/15, whilst inflation (CPI) has increased by 73%, the incidence of tax per 1000 cigarettes has gone up by as much 126%. This confirms that the growth in cigarette taxation is well ahead of inflation, and to that extent, affordability of cigarettes in India has only reduced further.
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 collections (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 discriminatory taxation, while the legal cigarette’s share of total tobacco consumption in the country has declined from 21% in 1981/82 to 11% currently, the overall tobacco consumption in the country has increased by 38% during this period.
Compounding the issue further is the fact that while the legal cigarette industry in India is in the organized sector, has statutory oversight and is completely compliant with all regulations, the bulk of tobacco consumed in the country is largely produced in the unorganized sector which does not have compliance and enforcement. This large unorganized sector (estimated at nearly 70% of overall tobacco consumption) pays little tax either due to tax exemptions or evasion.
Extremely high tax rates on Cigarettes provide a profitable arbitrage opportunity for tax evasion in India. According to Euromonitor International, India is now the 4th largest illegal cigarette market in the world. A recent FICCI Study on Illicit Markets 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 and resulting in a huge revenue loss of Rs.9,139 crores to the national exchequer.
It is thus evident that the excessive taxation on cigarettes does not decrease overall tobacco consumption. It simply catalyzes the growth of non-cigarette tobacco forms and compels people to switch to cheaper illegal cigarettes often of low quality, manufactured in unhygienic conditions.
The shrinking legal cigarette volumes have led to persistent drop in demand and price for cigarette tobaccos grown in the country. This has resulted in unprecedented financial distress of farmers and led to unfortunate cases of suicides by them in the tobacco growing States of Andhra Pradesh and Karnataka this year.
It is therefore, important that a clarification is issued on this outdated study which is also at variance with a study on tobacco taxation released by WHO itself with more updated information in 2015. The timing of the release of the ISID/PHFI Study is questionable and appears to be a concerted attempt by anti-tobacco activists to create incorrect perceptions on Tobacco Taxation Policy in the country.