High taxes take toll on cigarette output

Weighed down by higher taxes in the past three years, cigarette production has declined for the first time in 2007-08. According to the Tobacco Board of India, the cigarette production has dipped by 1.74 per cent.

"The decline is a direct impact of the 12.5 per cent value added tax (VAT) and higher sales tax in some states," said an expert.

The slowdown, he said, would be accentuated further by the increase in tax on non-filter cigarettes announced in the Budget. Non-filter cigarettes account for 30 per cent of the total market and contribute Rs 1,000 crore a year in excise duties.

"Such a high increase in excise duty is quite unprecedented. In fact, a 70 millimetre (mm) non-filter cigarette will now be more expensive than a filter cigarette of the same length. The exhorbitant hike in prices will make the segments unviable, affecting not only revenue collection but also rendering large numbers of workers redundant. In addition, a drop in tobacco leaf demand will have severe implications on the earnings and employment of farmers," said Udayan Lall, director, Tobacco Institute of India.

The government defends its policy of higher taxes as a measure designed to reduce consumption, according to a report by Euromonitor International, a market research firm.

Yet, figures from the health ministry suggest that the number of smokers in 2006 had remained more or less unchanged since the late 1980s with a few fluctuations. In 2006, there were 250 million smokers in the country.

Although India is the largest producer and exporter of tobacco in the world, the way tobacco is consumed in India is very different from rest of the world.

Cigarettes account for 15 per cent of the total tobacco consumed, unlike other countries where, on an average, cigarettes represent 90 per cent of the tobacco consumption. The balance 85 per cent is consumed in traditional forms such as beedis, chewing tobacco, khaini, snuff, etc.

As a result, not only the revenue collection is being dented, but also the overall tobacco consumption is increasing. The government is now contemplating cutting down tobacco cultivation in the country in order to reduce consumption.

Responding to the slowdown in production, ITC, the country's top cigarette maker, has already started shifting gears. The company employed Rs 940 crore capital in other fast moving consumer goods (FMCG), up by 92.2 per cent, in 2006-07.

The total revenue share of its other FMCG business went up from 8.2 per cent in 2005-06 to 11.7 per cent in 2006-07, and the share of the cigarette business dipped from 88.2 per cent this year against 91.7 per cent last year.