Tobacco Asia

Tobacco Asia 23 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 16.9% 17.8% 19.2% 21.3% 22.7% 24.0% 24.3% 24.3% 27.6% 25.9% 25.7% 26.1% 0.40% 0.80% 1.00% 1.03% 1.13% 1.19% 1.50% 1.68% 2.11% 2.30% 2.75% 5.71% Illicit market causes huge tax revenue losses The extremely low affordability of legal cigarettes in India encourages consumers to buy illicit cigarettes instead, which due to tax evasion are sold at significantly cheaper prices than legal products. According to Euromonitor International, India is the fourth largest illicit cigarette market in the world, with illicit products representing 26.1% of the market; or in other terms, almost one in every three cigarettes consumed in the country is illicit. Based on current tax rates, it is estimated that the government loses revenue of US$2.5 billion annually on illegal cigarettes. Apart from these gigantic losses, the illicit trade pro- motes various other direct consequences, including loss of business and livelihood in the value chain and exposing consumers to low-quality unregulated products. Taking advantage of the available tax arbitrage, illicit operators are specifically targeting India's growing middle class, particularly youths, to whom they are offering appealing product ranges including flavor variants customized to Indian palates Indian media outlets almost daily report seizures of illicit cigarettes, attesting to the fact that law enforcement authorities are trying to combat the problem. Yet it is an uphill battle. It has been observed that for every such seizure multiple consignments escape the surveillance net due to the sheer overwhelming volumes that are swamp- ing the country. This is evidenced by the widespread – and quite open – availability of smuggled cigarettes from small stores and informal shops on every street corner around the entire country. Excessive taxation one root cause for illicit product surge For years, India's legal cigarette industry has been burdened down by increasingly more punitive and discriminatory taxation.,"[…] Such inequitable tobacco taxation is leading to wide price differentials between legal cigarettes, other tobacco product varieties, and illicit cigarettes," said Sharad Tandan, director of the Tobacco Institute of India (TII). Yet although cigarettes represent only a 10% share of India's overall tobacco consumption (and including illicit prod- ucts!), this particular segment currently contributes around 80% of India's tobac- co tax revenues. However, consecutive waves of tax hikes did neither arrest nor decrease overall tobacco consumption, unlike what tobacco control and health authorities so often claim. Quite the con- trary has happened. Overall consumption has in fact increased… though at the ex- pense of legal cigarettes. According to figures collated by TII from the USDA, the World Food Organization (FAO), the Indian Tobacco Board, and industry estimates, consump- tion in India of legal, duty-paid cigarettes slumped by 28% between 1981/82 and 2023/24. Over the same period, other forms of tobacco consumption, includ- ing illicit cigarettes, grew by about 70%. In other words: the unfavorable tobacco taxation policy has led to a shift in con- sumption from legal tax-paid cigarettes to illicit cigarettes and other tax-evaded products, defeating both revenue and so- cial objectives of tobacco control. Correlation between tax hikes and illicit product surges India's repeated tax increases indeed show a rather clear correlation with the increase in illicit cigarettes (see chart). During the period between 2012/13 to 2016/17, when excise duty rates in- creased by a CAGR of 15.7%, revenue collections only grew at a meagre CAGR of 4.7%. Also in 2017, tobacco tax on cigarettes was hiked up by 6%. Then, in July 2017, India introduced a goods and services tax (GST), imposing an average additional tax burden of 13% on legal cigarettes, though that rate went up to 19% in the case of king-sized cigarettes (>75mm in length). And it is particularly in this segment where numerous smug- gled international brands are offered to consumers at prices far below those of local legal products. Thereafter, in the na- tional budget of February 2020, National Calamity Contingent Duty (NCCD) rates on cigarettes were subjected to an overall weighted average increase by 13%, only to be hiked up again by 16% in the na- tional budget of February 2023. "These successive years of escala- tion in excise duty and other taxes have ensured a continued rise in tax arbitrage Correlation between tax hikes and illicit cigarette influxes Sources: TII (tax rate increases on cigarettes); Euromonitor International (Illicit Cigarette Incidence, India) Share of Illicit Cigarettes(%) Tax per 2,000 cigarettes of the most sold brand as a percentage of per-capita GDP Sources: WHO Global Health Observatory, 2024 (cigarette tax data for 2022) World Bank (per-capita GDP data for 2022) USA Japan China Germany Russia Canada Pakistan Malaysia Thailand UK Australia India Tax per 2000 Cigarettes as a Percentage of Per Capita GDP Tax incr. 13% Excise 6% GST13% Tax incr. 2.4% Excise duty rate incr. CAGR 15.7% Steep incr. induty rates Stability induty rates Period of high duty rate increases Relative stability induty rates

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