Tobacco Asia

24 tobaccoasia Issue 1, 2025 January / February Handbook of Tobacco Taxation In his work, "Handbook of Tobacco Taxation – Theory and Practice," re- nowned economist Arthur Laffer stated that steep tax hikes do not result in pro- portionate tax revenue increases. Be- yond a certain point revenue actually starts declining as higher taxes encour- age consumers to switch to lower-tax substitutes or illicit products, thereby decreasing the tax base, Laffer wrote. In fact, it has been observed in several other countries that excessive taxation and regulation have been counterpro- ductive and that they brought on the unintended consequence of fueling the illicit trade. Australia and New Zealand are good examples for this phenom- enon. Both countries have for many years been at the forefront of tobacco control with high tax rates and stringent regulatory measures. Despite being is- land nations (and non-tobacco growing too), they have not been able to control the illicit cigarette trade and its many adverse consequences. As per recent media reports, some Australian par- liamentarians are now even seeking a reduction in cigarette taxes in order to break the business model of smuggling syndicates and to rein in a black market that has been described as "spiraling out of control." India: tobacco consumption 1981/1982 – 2023/24 Source: TII, collated from USDA; Tobacco Board; FAO; and industry estimates Year Legal Cigarettes Other Tobacco Total* (including illicit) * million kg. Share million kg Share million kg Share 1981/82 86 21% 320 79% 406 100% 2023/24 62 10% 543 90% 605 100% Difference -24 +223 +199 (-28%) (+70%) (+49%) Illicit packs of international cigarette brands openly displayed for sale at an informal shop. Credit: TII that favors smuggling syndicates, severely dents the legal cigarette industry, impacts tobacco farmers, and undermines the government's revenue objectives," said Tandan. Illicit cigarettes negatively affect farmers' livelihoods India is the second largest tobacco producer in the world, as well as a leading global exporter. The fact alone that there is no shortage of export markets should put the country's grassroots tobacco farmers at quite comfortable ease. But, amazingly, it doesn't; and that apparently likewise can be attributed to the rising illicit cigarette problem. "Ex- cessively high cigarette taxation has created a huge smuggled cigarette market in the country. Smuggled and illicit cigarettes now represent one fourth of the total Indian cigarette market," explained B. V. Javare Gowda, president of FAIFA, the Federation of All India Farmer Associations*. And, as national consumption figures for smuggled cigarettes have grown at the expense of legal cigarettes, the incomes and livelihoods of FCV tobacco farmers are getting hugely impacted because of the reduced offtake of domestic tobacco for ciga- rette manufacturing. "Smuggled cigarettes do not use domestically produced tobaccos, as they are manufactured in foreign countries. These contraband cigarettes originate from many countries, some of them being large producers of tobacco, such as China," Gowda told Tobacco Asia. According to FAIFA data, the growth in the illicit cigarette trade has resulted in a shrinkage of FCV crop production in India by a sharp 40%, from 316 million kg per annum in 2013/14 to 189 million kg per annum in 2021/22. That decline has caused the loss of around 240 million workdays of employment in FCV to- bacco growing areas. And although around 50% of FCV is exported, the balance is typically used domestically. However, domestic cigarette production volumes have steadily declined over the years due to decreasing demand. Also, FCV tobacco is primarily cul- tivated in semi-arid regions, where few other equally remunerative crops can be successfully grown. "In the absence of viable remu- nerative crop alternatives, FCV tobacco farmers affected by a domestic drop in demand are faced with having to leave their fields fallow," Gowda explained. And the high incidence of taxes on legal cigarettes is only acting as a luring incen- tive to illicit cigarette smugglers, making the livelihoods of local farmers ever more difficult. *The Federation of All India Farmer Asso- ciations (FAIFA) is a non-profit organization that represents the causes of millions of farmers across India. FAIFA strives to be an advocate of farmers' voices at regional, national and international levels and works to- wards ensuring the sustenance of their stable livelihoods.

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