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The coming national goods and services tax (GST) will, says the cigarette industry, help curb smuggling of items in the segment.
Cigarettes, both duty paid and tax paid, comprise 15 per cent of the entire tobacco market in India, which was estimated at Rs 144,000 crore in 2015.
The Tobacco Institute of India (TII), representing 98 per cent of duty-paying cigarette makers, says the country has become the fastest growing and fourth largest illegal cigarette market in the world, on account of excessive taxation.
"While, the legal cigarette industry continues to decline as a consequence of successive years of high excise duty rate increases, cumulatively going up by 125 per cent since 2012-13. During the past five years, the legal cigarette industry has seen more than 25 per cent shrinkage in volumes," says Syed Mahmood Ahmad, director at TII. "Excessive taxation leading to the huge arbitrage opportunity has provided an enormous incentive to smuggling syndicates and undermined the legal cigarette industry and the government's tobacco control policy and revenue collection.,"
The institute and other industry officials feel GST, with a uniform tax policy, will be able to bring price homogenity. And, importantly, due to the stringent procedure needed for tax declarations at each level of the trade, the share of contraband and counterfeit cigarettes will go down.The industry, though, is still to know the applicable tax rate on cigarettes under GST.
A report from business chamber Ficci says the International Consortium of Investigative Journalists has reported that some of the world's most feared terrorist outfits like Hezbollah, Taliban and al-Qaeda have been found to be involved in smuggling of cigarettes, as are the Real Irish Republican Army and the Kurdistan Workers' Party.
The report quoted Louise Shelley, a transnational crime expert at George Mason University, as saying "no one thinks cigarette smuggling is too serious, so law enforcement doesn't spend resources to go after it".
An industry official said cigarette smuggling is considered a low-risk but high-reward criminal activity. In the absence of harsh punishment or a lower risk of detection, people resort to importing cigarettes in the country illegally.
"The illicit cigarette trade can pose a serious security threat as there is evidence, globally, that organised transnational criminal groups are involved in it and money earned through it is used to fund serious criminal activities, including terrorism," the report stated.
Smuggled cigarettes were estimated at Rs 7,561 crore in 2013 and Rs 8,946 crore in 2015, an 18.3 per cent jump.
Ficci has also said high taxation alone cannot be responsible for the growth of the illicit cigarette trade. "This also results from lack of control on cigarette manufacturing and the movement of cigarettes and other tobacco products across international borders. Also, it is run by criminal organisations with sophisticated systems for distributing smuggled tobacco products. Illicit trade is more common in low-income countries than high ones," says its report.