Business Today

Where there’s smoke...

...There must be smuggling. Indian-made cigarettes, the #1 FMCG, are facing a tidal wave of smuggled imports that get away without paying killer excise rates.

Somnath Dasgupta | Print Edition: April 5, 2009

They come in many names, from the suspiciously familiar ‘Classic’ to ‘Dolphin’, in classy packs of 20s, and sit next to top foreign and Indian brands in Kolkata’s paan shops. Their edge: pricing. At Rs 20 for Myanmar’s Golden Elephant against Rs 80 for ITC’s Gold Flake, they have become the perfect starting point for the upwardly mobile bidi-smoker or gutkha chewer who has lost access to all cheap non-filter cigarettes.

Cut to the Commissioner of Customs (Preventive), Chander Bhan, who reigns over the borders of West Bengal and Sikkim. He displays a record haul of top-end foreign brands seized from Sealdah station in February. Valued at nearly Rs 40 lakh, it has taken this year’s total haul to over Rs 1 crore, against the 2007-08 total of Rs 24.36 lakh here. But Chander Bhan is puzzled: the latest haul came on a train from Delhi!

“Most of the Myanmar cigarettes usually come in from the North-East as air cargo, while some also come through Nepal,” says Chander Bhan, for whom the Davidoffs and Marlboro Lights are a glamorous relief from the usual chart-toppers— cattle, the cough syrup Phensedyl, which has become a favourite with drug addicts, cylinders of CFC refrigerants and ready-made garments.

So, how did Myanmar capture the low-end and renowned foreign brands the upper band? Check out the Union government’s decision in 2008 to increase sharply the excise on cigarettes, especially non-filter ones, on “health grounds”.

“Non-filter cigarettes are more toxic than filter cigarettes, yet they enjoy a favourable tax regime, which is iniquitous. I propose to tax both filter and non-filter cigarettes on par by applying …the higher rates,” the then Union Finance Minister P. Chidambaram had said in his Budget speech. The Budget raised the excise (including education tax) for cigarettes between 60-70mm long from Rs 562.38 to Rs 1,362.69 per 1,000 cigarettes, and for shorter cigarettes from Rs 173.04 to Rs 843.57 per 1,000 sticks, or Rs 8.43 per pack of ten.

Killing the Golden Goose?
According to the Tobacco Institute, a non-profit body, demand for nonfilter cigarettes is 2 billion sticks, with most packs priced around Rs 10 for ten, while demand for filter cigarettes is 98 billion sticks. The hike forced registered Indian manufacturers to quit making non-filter cigarettes, leaving the field open to smuggled filter-tipped cigarettes from Myanmar and local non-filters made clandestinely. The government’s excise collections are going flat, while the poor are not smoking less—they are enjoying king-size filters cheap!

Sources say illegal factories have sprouted below the excise radar on Indian soil: They don’t pay the excise of Rs 8.43 per ten priced at Rs 10 that registered ones had to. According to the Tobacco Institute, smuggled and clandestine cigarettes have increased their market share to 7 per cent from 2-3 per cent last year, and could reach 11 per cent by 2010.

Is there a case for moderate taxation?

Excise on cigarettes fetched Rs 8,532 crore in 2007-08, but cigarettes account for just 15 per cent of tobacco products in India, against 90 per cent in developed countries. At the western pattern of cigarettes-vs-other forms, the excise on cigarettes would yield the government Rs 51,192 crore a year.

Opportunity Lost
But that would be playing the Devil’s advocate. The world over, smoking is under attack as being injurious to health and India recently banned smoking in public places. But cigarettes cannot be banned, because of around 38 million reasons: the farmers, rural poor, women and tribals at the other end of the tobacco chain. Tobacco prices have been on a record upswing, powering exports (Rs 1,700 crore) in a gloomy commodity scene.

Then there is the excise collection. As ITC said in its 2008 annual report: “… The extremely high rates of excise duties coupled with VAT renders cigarettes unaffordable to the common man and drives the growing consumption of tobacco in the form of lightly taxed products like bidis, gutkha, chewing tobacco, zarda, etc. The steep imposition of taxes increases the arbitrage opportunity not only for smugglers of international brands, but also for clandestine domestic players…” Volume of these illegal cigarettes has doubled to nearly 300 million per month this year. As ITC said recently: “The extraordinary increase of 140 per cent to 390 per cent in the rates of excise duty on non-filter cigarettes in the 2008 Union Budget, coming on the heels of a 30 per cent increase in tax incidence in the previous year, drove the organised cigarette industry to substantially vacate this category.”

Smuggling Costs
According to the Tobacco Institute, the government could be losing Rs 1,500-2,000 crore a year in duties. But smuggling is difficult to check, because of the multiplicity of agencies tracking it, and their more pressing priorities. In West Bengal, the porous border with Bangladesh and Nepal is handled by the CCP and the Border Security Force. On top of their list: cattle being smuggled out to Bangladesh, inward bound betelnut, the cough syrup Phensedyl, banned refrigerant gases, ready-made garments and fake currency notes. Outbound: narcotics and red sanders wood.

The Excise Department keeps an eye on local manufacturers, the customs air cargo monitors passenger baggage, while the CCP tracks air cargo and the DRI and the BSF run their own border show. Till the government gets its act together, it could consider the opportunity cost of the huge excise burden.

Chidambaram had noted: “Education and health are the twin pillars… The total allocation for the education sector… will be increased by 20 per cent… to Rs 34,400 crore in 2008-09.” And the allocation for health: Rs 16,534 crore.

Moderating the excise on cigarettes would also give the government more funds to battle 19th century diseases like polio and kalazar. Cross funding is not new. Apart from India’s own education cess, US President Barack Obama recently expanded a health programme to include 3.5 million uninsured children. To fund the $32.8-billion expansion, he raised the tax on cigarettes to $1 per pack from the current 39 cents. Before this, the tax per 1,000 cigarettes in the US was just 0.24 per cent of per capita GDP, against 3.12 per cent in India. Most importantly, disincentives to smuggling will also choke the flow of funds to terror organisations that are said to back the illegal trade in cigarettes.

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