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Cigarette industry braces for 25% jump in illegal trade as taxes set to go up
Financial Express - 30 Jan 2012

With a hike in taxes imminent, the R24,000-crore organised cigarettes industry expects a 20-25% jump in the number of contraband or illegal cigarette sticks sold in the country each day. From a current estimated sale of 4.5 crore illegal cigarette sticks each day, the number is expected to touch 6 crore sticks by April, once the taxes go up.

Metros like Mumbai and Delhi alone account for 10% of these illegal sales, sources say. India is the sixth biggest destination in the world and fourth biggest in Asia for contraband cigarettes, according to a recent report by market and research analysis firm Euromonitor. Overall, the government tends to lose around R2,000 crore every year in revenue from the illegal sale of contraband cigarettes, which pay zero duty as they are smuggled from across the borders into Uttar Pradesh, Bihar, Madhya Pradesh, West Bengal, Orissa, Assam, and other North-Eastern states, says a recent Assocham study.

"There is a real chance that the taxes on cigarettes may go up in the coming Budget. However, with widespread availability of contraband cigarettes, I don't see how the government or the consumers will benefit from the move, which may actually backfire, encouraging illegal sales at a much faster pace," said a senior executive at a leading tobacco firm.

For the legitimate cigarette brands like Gold Flake, Four Square, Capstan and Classic, it is the smuggled Bangladeshi brands like Aziz Gold, Gold Leaf, and Banani Gold that continue to offer a challenge, denting their business as well as causing financial loss to the exchequer.

States like UP, Bihar, MP, West Bengal, Orissa and Assam remain popular selling destinations for these contraband cigarettes.

The excise rate for king-size cigarettes (75 mm-85 mm) is R2,017.77 per 1,000 cigarettes, which works out to R40 on a legitimate pack of 20 cigarettes having its retail price of R100. Additionally, VAT and Octroi are imposed on a legitimate cigarette packs, taking the tax component to around R70, whereas a smuggled pack of cigarette itself is sold between R70-80. This causes a combined estimated loss of R1,700-2,000 crore to the government and those involved in legitimate business. 

Globally, the smuggled cigarette market stands at over 520 billion sticks a year, while India accounts for 17 billion sticks. However, by 2013 the global contraband cigarette market will reach 535 billion sticks a year, says a report by the Euromonitor.

"The trend in the smuggled cigarette trade has been upwards between 2004-09, with major growth coming from India, Philippines, Pakistan, Indonesia, Vietnam and Malaysia," it said. The report links a consistent price increase of cigarette packs across Asia to the flourishing illicit trade.

"In India, the contraband cigarette business increased after 2004 when the UPA government came to power and increased the taxes. Since 2005, the government has consistently imposed a 5% excise duty on cigarettes in every Budget, which made the branded cigarettes costlier by 20-25%, compared to the 2000-2004 period,” the executive quoted above said.

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