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Tobacco Institute refutes study on low taxes

Counters recently revealed study, calling it outdated; blames extremely high tax rates for providing profitable arbitrage opportunity for tax evasion in India

Bhaswar Kumar  |  New Delhi 

Image via Shutterstock
Image via Shutterstock

A recently released study on tobacco taxes in India was timed perfectly by the anti-tobacco activists, right before the Union Budget, to influence public opinion and policy makers, said The Tobacco Institute of India.

The study titled Tobacco Taxes in India: An Empirical Analysis and undertaken by Institute for Studies in Industrial Development and Public Health Foundation of India looks at the period between 2006 and 2013. It was submitted to the World Health Organization (WHO) in March 2014. “Not only is the study outdated but also at variance with a more recent one released by the WHO in 2015,” said The Tobacco Institute of India in a release on Friday.

Disputing reports that a hike in duty on tobacco products is called for in light of the study, the institute claimed that “high and discriminatory taxation on has led to unabated growth of illegal and revenue-inefficient cheaper tobacco products.”

Stating that the recommendations made in the study overlook the “objectives of tobacco control in the country, government revenues and the livelihood of millions of farmers and others that are dependent on tobacco”, the institute claimed that a correct perspective on tobacco taxation policy of the government and its “consequences” was required.

Countering reports suggesting that the study shows that tax on tobacco products is too low, the institute said, “Over the last three and a half years, the incidence of central excise duty and state value added tax (VAT) on cigarettes, at a per unit level, has gone up cumulatively by 98 per cent and 124 per cent, respectively, which is exerting severe pressure on the legal cigarette industry even as illegal grow unabated.”

It added that overall tobacco consumption is shifting to cheaper non-cigarette tobacco forms.

Citing what it described as “punitive taxation” since 2012-13, the institute claimed that the legal cigarette industry in India has dropped from 110 billion sticks in 2011-12 to 95 billion sticks in 2014-15 and a further drop was expected in the current year.

Referring to the recent WHO study on the subject from 2015, the institute said that it revealed that at 6.5 per cent of per capita GDP, cigarette taxes – excise duty and state VAT – in India were among the highest in the world. In fact, the institute claimed the study showed that cigarette taxes in India were 14 times higher than in the USA, 9 times higher than in Japan, 7 times higher than in China, 5 times higher than in Australia and 3 times higher than in Malaysia and Pakistan.

Additionally, the release said that tobacco consumption pattern in India were unique in that only 11 per cent of total tobacco was being consumed in the form of legal cigarettes, while the balance 89 per cent was being consumed in other forms of tobacco consumption and illegal cigarettes. At 87 per cent, legal cigarettes contributed the majority of the excise revenue from tobacco despite their very small share of total tobacco consumption in the country, it added. The reason, according to the release, for this distorted pattern of revenue collections was that “cigarettes are subjected to high and discriminatory rates of taxation compared to other tobacco products”.

The institute claimed that during the period 2008-09 and 2014-15, while inflation (CPI) increased by 73 per cent, the incidence of tax per 1,000 cigarettes went up by as much as 126 per cent. According to the release, this confirmed that the growth in cigarette taxation was well ahead of inflation, and to that extent, “affordability of cigarettes in India had only reduced further”.

Commenting further on the result of “discriminatory taxation”, the release said, “As a result of discriminatory taxation, while the legal cigarette’s share of total tobacco consumption in the country has declined from 21 per cent in 1981/82 to 11 per cent currently, the overall tobacco consumption in the country has increased by 38 per cent during this period.”

The institute blamed the extremely high tax rates on cigarettes for providing a profitable arbitrage opportunity for tax evasion in the country. Citing Euromonitor International, the release said that India is now the fourth largest illegal cigarette market in the world. Additionally, it cited a recent FICCI study on illicit markets and stated that the overall market for illegal cigarettes in India stood at 20.2 per cent of the cigarette Industry, having grown from 15.7 per cent in 2010 and resulting in a huge revenue loss of Rs 9,139 crores to the national exchequer.

First Published: Wed, February 24 2016. 00:23 IST