New Duty Format For Cigarettes May Hit Government Revenue

The Tobacco Institute of India has warned the government that the excise duty structure proposed on cigarettes in the 1997-98 budget will be counter-productive. It will cause a 7 per cent shrinkage in total volumes, leading to a Rs 500 crore shortfall in targeted revenues, says the institute.

The institute finds the tax structure anomalous on two counts: first, the higher rates of duty proposed on lower value products and lower duties on higher value products, and secondly, the high weighted average increase of 15.5 per cent in the rates of duty on the three lower value slabs, which is more than double the inflation rate forecast.

 

This segment accounts for 87 per cent of the industry volume. Consumers of these cigarettes are in the lower income group and hence highly price-sensitive, says the institute.

Cigarettes are broadly classified into five different segments. The budget proposes to increase the excise duty on the premium segments, which accounts for only 13 per cent of the cigarette volume, by 2.6 per cent. But the increase proposed in the three lower segments, which have an 87 per cent share of the cigarette volume, is a massive 15.5 per cent.

The institute expects consumers in the lower end of the market to shift downwards to non-revenue-efficient products.

The government plans to raise Rs 4,762 crore in excise duty on cigarettes this year. The institute says the shortfall in revenue cannot be made up for by other tobacco products. The shrinkage in cigarette volumes, it adds, will bring down tobacco consumption and narrow the tax base.

The institute says the 3 per cent across-the-board increase in excise duty, favoured by the tobacco industry, will ensure that the revenue collection meets the target, while expanding the cigarette market by 12.7 per cent.