Optic fibre network reaches 83,000 gram panchayats
wondered about the unholy nexus between increase in taxation, illicit trade and lower revenues for development? It's not far-fetched, it's true. Increased taxation and duty rates lead to increased illicit (or unlawful) trade and ultimately defeats the purpose of increase in taxation due to allocation of more funds in security expenditure to curb terrorism, a part of which is financed by illicit trade.
No country in the world should be more alive to this aspect of taxation than India where the nexus between increase in taxes and duties and illicit trade is formidable.
The FICCI CASCADE- KPMG India report, quoting data of US Homeland Security, says that the number of terrorist activities in India increased to 927 in 2016 from 798 in 2015, showing an alarming increase of approximately 16 per cent. Neighbouring Pakistan, however, has slipped by a position from 2015 to occupy the fourth spot in the 2016 report. A number of nations such as Afghanistan, Pakistan, Nigeria and Yemen, on the other hand, witnessed lesser number of terrorist activities in 2016, compared to 2015. Further, Iraq, Afghanistan, Pakistan, India and Nigeria accounted for nearly 55% the global terrorist attacks in 2015. Nearly 75 per cent of all deaths in 2016 due to terrorist attacks took place in five countries (Iraq, Afghanistan, Nigeria, Syria, and Pakistan).
But how exactly does increase in taxation led to decrease in developmental revenues? Increase in taxation leads to increase in market price, making production less profitable and forcing manufacturers to adopt alternatives. This lower the supply of genuine products and further increase in prices. Price increase fuels a hike in counterfeiting and smuggling, the spoils of which go into the financing of terrorism and organised crime. Measures to curb the menace demand an increase in security expenditure from the tax reserves by the state, thus defeating the very purpose of increased taxation.
The existence and operation of illicit trade vis-à-vis counterfeiting and smuggling has been an enduring problem in India that has escalated in scope and magnitude, impacting industries, government, economies and, the health and safety of the consumers. Smuggling, especially, has been a point of concern for the Indian administration for the past many decades, with narcotic drugs, gold and cigarettes accounting for the major smuggled goods. As per the Directorate of Revenue Intelligence (DRI) estimates, the value of seizures for gold and cigarettes in 2016-17 stood at INR 435 crore and INR 78 crore, respectively and the seizure value for narcotic drugs in 2016-17 were INR 4885 crore, thus suggesting the large magnitude of smuggling industry in India.
According to various law enforcement agencies, sophisticated antismuggling devices have been installed at airports and seaports to check and scan various containers and shipments entering the country. However, it seems to have had little effect with smugglers finding innovative ways to continue their nefarious activities, specially with large and porous land borders.
The seizures in the recent past are only the tip of the iceberg of a much larger and threatening operation in the country. For every seized consignment there are a large number of consignments that escape surveillance and find their way into the market.
In India, smuggling takes the form of mis-declaration, undervaluation, misuse of end-use and other means. In 2016, the seizure value for mis-declared goods stood at INR 1,187 crore, while that of undervaluation of goods stood at INR 254 crore. The seizure value from misuse of end use was at INR 2,780 crore, seeing a rise from INR 953 crore in 2015, an increase of 190% in 2016 over the previous year.
The most commonly counterfeited and smuggled goods are tobacco, cigarettes, electronic items, gold, machinery and parts, alcoholic beverages, auto components, Fast Moving Consumer Goods (FMCG) and mobile phones.
There are certain factors that drive the growth of illicit trade in the industry. Higher taxation rates, availability of cheaper alternative, lack of awareness and lack of enforcement mechanisms are key factors that encourage the consumers to opt for counterfeits, smuggled or pirated goods without realising the after effects of promoting the illicit trade.