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EXCISE ON CIGARETTES - Real bad for Big Smoke
Business India - 26 Nov 2001

Continued punitive taxation at the Central and state levels over the years has led to a progressive migration from cigarettes to other forms of tobacco consumption, the share of cigarettes falling from around 23 per cent in 1971 to below 16 per cent currently. Of the 200 million tobacco consumers in India, fewer than 15 per cent can afford cigarettes, the international preference. Non-cigarette forms of tobacco consumption contribute barely 10 per cent of government revenues from the sector on account of the difficulty of tax collection and the low tax yields that characterise this largely unorganised sector. This structure of the tobacco industry and the high rates of taxation on cigarettes have combined to diminsh the share of cigarettes in tobacco consumption, even as the aggregate tobacco consumption in India continues to grow driven by the growth in non-cigaertte forms of consumption. Consequently, the tax buoyancy of the tobacco sector stands diminished. – excerpted from ITC’s 2000-1 annual report.

Every Union budget announcement in recent years has come with the single-point agenda of taxing certain items of supposedly ‘elite’ consumption like petrol, aviation turbine fuel, liquor, and cigarettes. This year’s budget has been particularly severe on tobacco companies. The 15 per cent excise duty surcharge on cigarettes is the highest imposition in the past eight years. The net effect of the skewed taxation policy of the Central government is an increase in contraband cigarette sales apart from a gradual shift in tobacco consumption patterns in the country. But people have generally come to accept this flawed taxation policy as a fact of life. Additionally, a ban on cigarette advertising has just compounded the matters for tobacco majors already reeling under excessive taxation while advertising by international brands continues unabated with increased penetration of satellite channels into Indian homes.

According to industry estimates, around 87-100bn cigarettes valued at Rs10,000 crore are sold in the country every year. ITC, the undisputed market leader and one of the largest private sector companies in the country, alone sold 66,145 million sticks the previous year. The government earned an estimated Rs7,416 crore in excise revenue for 1999-2000 and foreign exchange through exports of tobacco and related products stood at around Rs1,050 crore. Cigarettes are one of the most highly taxed commodities in India, and almost half the gross revenues of cigarette companies like ITC, Godfrey Philips, VST, and GTC go towards excise payments.

In addition, 10 state governments have imposed a luxury tax on cigarettes, the most noteworthy being Kerala. The tobacco companies have stiffly withstood these levies, calling them "unconstitutional". The Kerala high court recently struck down the levy on the ground that no material had been placed before the judge to prove that the luxury tax was imposed as a charge for a convenience or service provided by the state on those who choose to avail of the service. Analysts estimate that taxes paid by ITC alone as luxury tax over the past four years total Rs 250 crore.

The 15 per cent surcharge is believed to be the main reason for the increase in contraband sales, leading to a loss of excise revenue and a foreign exchange outgo on this count. The surcharge is the main cause, along with the lifting of quantitative import restrictions, of dwindling volumes in the Re1 filter cigarette market (less than 70mm size, called regular filters). Owing to this duty structure, all smuggled brands (80mm size) are available for as little as Re1 compared to Rs2.50 for the Indian-made brands. ITC estimates the loss of excise revenue at around Rs800-1,000 crore and the forex outgo at Rs1,200 crore. The market for contraband cigarettes is worth around Rs500 crore in Andhra Pradesh alone. Now no longer under quantitative import restrictions, cigarettes can now be freely imported and attract only a marginal import duty.

It’s not difficult to make sense of such irrational duty imposition by the government when you look at the employment-generation in the unorganised tobacco sector. Tobacco supports the livelihoods of six million tobacco-growing families and around 20 million employees in the organised sector. "Taxation of other forms of tobacco consumption is a political minefield. In addition, the unorganised nature of the industry makes tax recovery difficult. This is because of the large-scale employment-generation by the sector," explains an analyst. According to reliable industry estimates, present tobacco consumption is totally skewed in favour of chewing tobacco and paan masala, with a lion’s share of 48 per cent, followed by beedis, which constitute around 36 per cent. Cigarettes are the smallest component with a 16 per cent share. A decade ago the pattern was beedis 54 per cent, chewing tobacco and paan masala 27 per cent, and cigarettes 19 per cent.

The decline in the share of cigarettes doesn’t mean more people are shedding the tobacco habit – the fact is, tobacco consumption in other forms continues to grow. In value terms, consumer spending on cigarettes during 1999-2000 was to the tune of Rs8,850 crore. According to industry estimates the total tobacco consumption is growing at around 2.1 per cent per annum in India and is currently pegged at 406 million kg, cigarettes constituting 77m kg, beedis 219m kg, and other forms of tobacco about 110m kg. Consumers have been shifting to beedis, on which Rs 6,876 crore was spent, a good 29 per cent higher than the 1994-95 level. Spending on zarda, supari, and branded paan masala stood at Rs7,944 crore. The total tobacco-consuming population exceeds 200 million, and though it spends more on cigarettes than on other forms, there are only 25 million cigarette- smokers as compared to 100 million beedi-smokers. In most countries cigarettes constitute 80-90 per cent of total consumption.

Discriminatory taxation has had hardly any impact on the overall tobacco consumption pattern, which is growing, but it is also contributing to a gradual shift towards the lower end of the market. Cigarette-smoking is projected as an undesirable social evil which should stop. The rational solution suggested is to tax consumption to the ceiling and smokers are expected to restrain their habit. This is with complete disregard to other forms of tobacco consumption. But facts and statistics prove otherwise.