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Illicit trade, fakes burn cigarette firms' revenue
Financial Chronicle - 17 Apr 2013

India is fifth largest market of illicit cigarettes, says Euromonitor

Organised sector cigarette manufacturers, including the market leader ITC, are feeling the pinch of illicit trade in cigarettes in India, which has grown enormously.

According to Euromonitor International, India is the fifth largest illicit cigarette market in the world. In fact, the overall market for illicit cigarettes in India is now estimated at around 18 per cent, of which approximately 70 per cent is excise evaded domestic manufacture. Consequently, the combined loss on account of illicit trade (illegal manufacture and contraband) is estimated to be in excess of Rs 6,000 crore.

According to Tobacco Institute of India consumers are being forced to shift to cheaper and revenue inefficient forms of tobacco consumption, including illicit. As a result, not only are revenue collections being sub-optimised, but also, overall tobacco consumption is increasing. While cigarette consumption has come down 16 per cent (from 86 million kg to 72 million kg) between 1981-82 and 2011, consumption of non-cigarette forms has gone up 26 per cent (from 320 million kg to 403 million kg) during the period.

“Independent market research indicates that, in India, whilst there is a fall in volumes of duty paid cigarettes by 4.4 per cent during the period 2005 to 2010, the duty-not-paid volumes grew by 49.3 per cent during the same period. India has now been recognised as one of the leading destinations for illegal cigarettes,” ITC’s latest directors’ report said.

Not just cigarette makers, but independent sector analysts also pressed the panic button over illicit cigarette trade. Ritwik Rai, analyst at Kotak Securities said extreme high excise duty and VAT rate on cigarettes in India make smuggling a particularly attractive proportion. “Smuggled and local cigarettes are increasingly becoming a nuisance for the organised players,” said Rai.

Devangshu Dutta, chief executive of Third Eyesight said there is significant difference between the prices of smuggled and branded cigarettes. “Increasingly, cigarette smoking is spreading to the hinterland and rural folks are also buying imported fancy brands. Also, smoking population in public places is increasing even with the ban,” Dutta said.

ITC officials said attractive tax arbitrage opportunities, as a result of high level of taxes on the legal domestic cigarette industry in India, incentivises illegal flow of cigarettes into the country, especially of internationally advertised and known brands through the porous borders.

The Tobacco Institute of India (TII) is also aware of the problem. The institute feels that a large number of small units have been set up by unscrupulous manufacturers whose products are available at prices which are even lower than the applicable excise duty/VAT rates. This can only happen if stocks are being illegally removed from the factory without payment of excise duty.

“With the legitimate, duty paid industry having vacated convenient and affordable price points, duty-evaded filter cigarettes are available at Rs 10 per packet of 10 cigarettes (Re 1 per stick). It is estimated that such illegally cleared stocks account for as much as 13 per cent of the industry. Another undesirable outcome of the increasing illicit trade has been the emergence of organised criminal syndicates who now control this illegal activity and which could also have serious consequences for the maintenance of law and order. Internationally, it has been reported that illegal profits from cigarette smuggling have been used to fund terrorist activities,” Udayan Lall, director, TII, told FC. He however, said that late though, the government is making determined efforts to contain this menace.

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