'High taxation leading to growth of illegal cigarettes'

High and discriminatory taxation on cigarettes has led to unabated growth of illegal cigarettes and cheaper forms of tobacco products, an institute has said.
The Tobacco Institute of India said that as a result of discriminatory taxation, the share of legal cigarette industry in total tobacco consumption in the country has declined to 11 per cent at present, from 21 per cent in 1981-82.
However, overall tobacco consumption in the country has increased by 38 per cent during this period, it said.
Over the last three-and-a-half-years, the incidence of Central Excise Duty and State VAT on cigarettes, at a per unit level, has gone up cumulatively by 98 per cent and 124 per cent respectively, the institute said.

The high taxation 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, it added.
The institute said during the period 2008-09 and 2014-15, whilst inflation (CPI) has increased by 73 per cent but the incidence of tax per 1000 cigarettes has gone up by as much 126 per cent.

This is taking place even as sale of illegal cigarettes is
growing unabated and the overall tobacco consumption continues to shift to cheaper non-cigarette tobacco forms, it said.
"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," it said.

It said that an analysis of the data contained in the WHO Report on Tobacco Taxation, 2015 reveals that at 6.5 percent of per capita GDP, cigarette taxes (Excise Duty and 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," it said.
It said that the incidence of high taxes has made legal cigarettes extremely "unaffordable" in India and the WHO Report 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 per cent, which is higher than most developed and developing countries (USA 1.14 per cent, Russia 1.31 per cent, Germany 1.55 per cent, Canada 1.68 per cent, China 2.14 per cent, Australia 2.53 per cent, UK 2.87 per cent, Malaysia 3.4 per cent and Pakistan 3.73 percent).
Terming the tobacco consumption pattern in India as "unique" where only 11 per cent of total tobacco is consumed in the form of legal cigarettes, TII said that the balance 89 percent is consumed in other forms of tobacco consumption and illegal cigarettes.
It said that legal cigarettes contribute the majority 87 per cent 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 said.
TII said that compounding the issue is thefact that while the legal cigarette industry in India which 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 unorganised sector
"Extremely high tax rates on cigarettes provide a profitable arbitrage opportunity for tax evasion in India," it said and referred to Euromonitor International report which states that India is the 4th largest illegal cigarette market in the world.