As taxes increase, demand for smuggled cigarettes rises

Smuggled cigarettes from countries, including China, UAE, Indonesia and Bangladesh, now account for over a fifth of the cigarettes sold in India, and in cities like Pune, they add up to 40% of overall sales. Besides, heavy taxes on legal cigarettes make them 150% to 250% costlier than smuggled ones, said Syed Mahmood Ahmad, director, Tobacco Institute of India.

In the last four years, excise duty has gone up by 118% and value-added tax (VAT) by 142% on a per unit level. “This has resulted in cigarettes becoming dearer and higher costs getting passed on to customers,” said Abneesh Roy, Tanmay Sharma and Alok Shah, analysts, Edelweiss Securities Ltd in a recent report.

Analysts at Edelweiss expect a 8% to 10% year-on-year hike in excise duty on cigaretters in the budget. In four of the last five budgets, 2016 being the only exception, excise duty on cigarettes was raised sharply. In 2016, the hike was the lowest at 10%. It was 13% in 2015, 21% in 2014, 18% in 2013 and 20% in 2012.

This has helped reduce the share of legally manufactured Indian cigarettes in the overall tobacco consumption — from 21% in 1981 to below 11% in 2015. However, tobacco consumption has risen by 38% during the same period, Ahmad said an emailed response to Mint’s queries.

The rise in consumption of smuggled cigarettes has gone up by over 90% in the last decade, according to an October report by the Federation of Indian Chambers of Commerce and Industry (Ficci), resulting in a revenue loss of ₹9,139 crore for the exchequer.

Tobacco products like bidi, khaini, chewing tobacco, gutka and illegal cigarettes together constitute 89% of the tobacco consumption in the country, according to analysts at Edelweiss.

Sales of illegal packs have also increased a lot more in the past year, following the implementation of the 85% graphic prohibition display rule from April. In comparison, illegal cigarette brands such as Win by Chinabased Hongyunhonghe Tobacco (Group) Co Ltd, Gudang Garam International and Djarum Black made in Indonesia do not need to comply with these regulations.

“Consumers perceive them (smuggled cigarettes) to be safer,” said a company official at a top cigarette manufacturing company who did not want to be identified. “The current regulations are failing to curb tobacco consumption. The government is also losing out on tax collection.”

To be sure, tobacco products generate a significant share of the country’s excise duty and state taxes—amounting to more than ₹31,000 crore annually.

In addition, foreign exchange earnings through the export of tobacco and tobacco products garner around ₹6,000 crore annually, Ahmad said, adding, legal cigarettes contribute 87% of the tax revenue from tobacco, despite having just a small 11% share of total tobacco consumption.