Key Impacts, Risks and Opportunities: Sustainability Challenges

The cigarette industry in India continues to be impacted by a discriminatory taxation and regulatory policy framework. The steep increase in the tax rates on cigarettes, both at the Central and at the State level, has led to the undesirable consequence of shifting consumption to lightly taxed (bidis etc) or tax evaded tobacco products, which constitute as much as 85% of the total tobacco consumption.

The domestic legal cigarette industry is faced with the growing menace of illegal cigarettes. Independent research indicates that, in India, whilst there is a fall in volumes of ‘duty paid’ cigarettes by 4.4% during the period 2005 to 2010, the ‘duty-not-paid’ volumes grew by 49.3% during the same period.

India has now been recognised as one of the leading destinations for illegal cigarettes. Attractive tax arbitrage opportunities, as a result of the high level of taxes on the legal domestic cigarette industry in India, incentivises illegal flow of cigarettes into the Country.

Another dangerous outcome of the increasing volume of illicit trade is that it encourages the entry of organised criminal syndicates, which can have serious law and order consequences for the country.

	ITC will continue to engage with policy makers through industry associations to seek a non-discriminatory tax and regulatory regime on tobacco products in the interest of the Government exchequer, domestic farmer community and industry.
	It has been ITC’s strategic intent to create multiple drivers of growth by building a portfolio of world-class businesses leveraging enterprise strengths such as consumer insights, innovative product development, brand building, state of the art manufacturing as well as an efficient supply chain and distribution infrastructure as well as sustained investments in R&D.

Given the agro-climatic nature of the tobacco growing regions which are mostly rain-fed, the farmers get an assured income from growing tobacco and without any proven alternative crops.

The disproportionately high taxation on cigarettes also adversely impacts the livelihood of famers in general and the dependent community in particular. Tobacco farmers are important constituents of the Tobacco Industry. Nearly two hundred thousand farmers grow tobacco in 2 southern states of India.

High excise duty on cigarettes leads to an increase in the price of cigarettes, which has an impact on the demand for the product. As the price of the product becomes unaffordable, consumers tend to switchover to low cost options like Bidis and illegal cigarettes, which has been quite evident with the decline in the proportion of cigarettes in overall tobacco consumption from 25% in early 1990’s to 15% in 2011-12. Reduction in the demand also impacts the market prices of the farm produce.

To cite an example, due to the steep increase in excise duty (by 360%) on non-filter cigarettes during the Union Budget of 2008-09, non-filter cigarettes which accounted for nearly 30% of the cigarette industry, were virtually wiped out of the markets. This had an adverse impact on the demand for domestic tobacco. As a result of this steep hike in tax rates, tobacco which was being used in the manufacture of non-filter cigarettes witnessed a sharp fall in prices (over 20%) during the 2010 market season, thereby adversely affecting the incomes of tobacco farmers.

Disparities in cigarette taxation structures would lead to an increase in the smuggling of cigarettes from nearby countries, which would jeopardise the prospects of the Indian Domestic Trade and in turn the dependent farming community.