Taxing cigarettes under GST: Is the situation getting out of control?

Financial Express By September 12, 2017 7:06 AM

Existence of illicit markets is a matter of serious concern for any economy since it has wide adverse effects on trade, government revenue, employment, crime control and, most importantly, on the security of the country and health of the people

The taxation policy has resulted in the shrinkage of legal cigarette industry and shifted consumption to other cheaper and substandard forms of tobacco.

Existence of illicit markets is a matter of serious concern for any economy since it has wide adverse effects on trade, government revenue, employment, crime control and, most importantly, on the security of the country and health of the people. Illicit trade has emerged as one of the formidable challenges before our nation. It is a faceless enemy that is unleashing unimaginable damage. A study by the Ficci Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE) has revealed that in seven manufactured goods of common consumption, the supply of unaccounted and untaxed goods increased by 44.4% in a matter of just two years, between 2012 and 2014. This resulted in sales loss of Rs 1,05,381 crore in 2014. The government’s loss in tax revenue was to the tune of `39,239 crore. Of this, the maximum loss of revenue of Rs 9,139 crore was in the tobacco sector.

The study also revealed that the share of grey market in tobacco products increased from 15.7% to 20.2% during 2012-14. Of the said seven items, cigarettes have emerged as one of the top smuggled items in the country, with the Directorate of Revenue Intelligence (DRI) seizures reaching highs of Rs 162 crore in 2015-16 and Rs 78 crore in 2016-17.

The GST is being rightly hailed as a landmark taxation reform in the history of modern India; it is also an excellent example of the success of our cooperative federalism. While most of the things are in perfect order, in respect of a few areas it is observed that further improvements are required. It is noticed that there exist some anomalies which, in all probability, have occurred through inadvertence. A case in point is the sharp increase in GST compensation cess on cigarettes shortly after July 1, 2017. A correction in cess rate was required due to the mistake committed and later accepted by the government in calculation of the right level of rate at the time of implementation. However, as it is seen while making correction, the level at which the revised tax rate has been pegged is much more than what would have been appropriate.

The decision of the government to maintain revenue neutrality has been lauded by one and all as a wise step. This decision about the total tax on cigarettes indicates that on this item there has been a departure from the concept of revenue neutrality. Initial calculations indicate that the annual tax burden on the legal cigarette industry could be to the tune of an additional Rs 4,000 crore, which is much higher than what was needed not to exceed the revenue neutral level.

We have to be conscious about the ground realities with regard to the legal industry. Over the years, there has been a huge surge in illicit and smuggled cigarettes, and at the same time tobacco consumption has grown manifold during the last 35-odd years. Whereas tobacco consumption increased by 38% between 1981-82 and 2014-15 (from 406 million kg to 562 million kg), the share of consumption of legally-manufactured cigarettes declined from 21% to 11% during the period collectively for all tobacco products. The gap thus created has been filled either by the indigenous illicitly-made or smuggled products. The illicit trade in cigarettes is very high; the data of seizures by DRI clearly demonstrates the growing menace of smuggling, resulting, inter alia, in huge loss of revenue to the government exchequer. This fact is supported by newspaper columns and articles regularly showcasing its detrimental impact.

Today, illegally-traded cigarettes constitute 23% of total consumption in India. According to Euromonitor International, India is the fourth-largest illegal market of cigarettes, which has more than doubled in terms of quantity between 2005 and 2015. It also needs to be underscored that 88% of the tobacco consumed in India is in non-cigarette forms, like khaini, snuff, cheroot, gutkha, hookah, bidi and so on. The taxation policy has resulted in the shrinkage of legal cigarette industry and shifted consumption to other cheaper and substandard forms of tobacco. This kind of taxation policy cannot be said to be in public interest.

We’re confident the government will address this genuine concern of the legal industry. The increase of GST compensation cess on cigarettes is an anomaly that needs to be addressed to protect not only the legal industry and government revenue, but also the health of the people which suffers as a result of consumption of illicit products made in unclean and unhygienic conditions. No doubt, tobacco consumption is injurious to health, but it cannot be denied that even with respect of an item like this, a quality product is less harmful than a substandard one manufactured without any consideration of quality norms and marketed without following statutory warnings.

It was not the intention of the GST Council to impose any additional burden on the legal cigarette industry which is already reeling under huge pressure from smuggled goods. Can we expect that this matter will be addressed sooner than later so that the situation is not allowed to go out of control?

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