Ecopinion / S L Rao

I have for long argued for opening up the economy to competition, giving the consumer the widest possible choice, keeping indirect tax rates at levels that do not encourage evasion and selling of tax-not-paid products made in India or overseas, ensuring that all products sold in India follow common minimum rules and standards, preventing hostile takeovers by rich foreign companies of well-run Indian ones, etc. We had made one assumption, that foreign companies would be law-abiding, would work to principles of good management and not take routes that are usually followed by the criminal underworld. Internal documents of the major cigarette manufacturers in the world published on internet websites show that the assumptions did not apply to them.

What these documents show is that cigarette companies were looking for ways by which they could avoid the high indirect taxes that almost every government levies on cigarettes, ostensibly to discourage consumption, but which also bring in huge tax revenues. They seem therefore to have organised the sales of taxfree cigarettes in many countries and particularly in Latin America and Asia including India. A note of evidence filed with a British Parliamentary committee some months back says : "Examination of the papers showed that involvement in smuggling was so prevalent in BAT that a majority of the present management board of the company can be shown to have been complicit in the commission of criminal offences overseas." When excise duty, sales taxes and entry taxes vary between 60 to 70 per cent of the prices of king-size premium cigarettes, there is obviously a lot of money to be made by evading the taxes. If the cigarettes could be sold at lower prices, larger sales volumes would be possible. It is not surprising that a survey by IMRB on the grey market for such cigarettes, finds it to be substantial. This is now made much easier by the reduction in import duties in Nepal and Bangladesh and our porous borders.

If BAT is actively encouraging this duty-not-paid business through duty-free shops (from where there is suspected to be leakage), returning Indian expatriates from the Middle East, naval ratings with duty-free supplies, and smuggling, it seems inconsistent with their status as owners of over 32 per cent of the shares each in ITC and VST. The answer might be that ITC is highly independently Indian managed, and that BAT has a trademark agreement that requires ITC permission for them to set up new manufacturing facilities. There may be little profit for BAT from using ITC. VST is not a high quality manufacturer and would need large resources for new equipment, which BAT would need government permission to bring in, and to which ITC could object. This might explain BAT’s suspected attempts to buy up enough shares to get a majority stake in VST through Brightstar so that BAT could then be free to make its premium cigarettes in VST factories.

In the light of the internal BAT documents now accessible on the Internet, the question is whether such local manufacture is, for BAT, only a front for the active encouragement of sales of duty-not-paid cigarettes made in other countries ? After all, many of us must have experienced shopkeepers telling us that they were able to sell imported products cheap because they were confiscated goods auctioned by customs. Shops show small turnovers for sales tax, which enables them to use that as cover for much larger sales without paying sales tax. The even more troubling question is whether this is happening with many other products that are now allowed to be imported legally. Are many of these goods actually smuggled in without paying any taxes, with some small legal import as the `front’ to cover up the illegal imports and sales? This can happen so long as Indian import duties and other local taxes are as out of line as they are with those of many other countries. There is profit to be made by importing without taxes, the same branded product made in another country where taxes are lower. At least till our tax rates match that of most others, we should use packaging laws, and tight policing of borders to prevent such import, and loss of revenues to government.