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Sustainability Report 2013
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Key Impacts, Risks And Opportunities:
Sustainability Challenges

Taxation and Regulation

High Rates of Taxation on Cigarettes

The construct of the tobacco industry in India is unique and is largely dominated by non-cigarette products which are not only cheaper but also revenue inefficient. With over 17% of the world population, India has a miniscule share of only 1.8% of global cigarette consumption. In fact, India’s annual per capita consumption of cigarettes is amongst the lowest in the world. While cigarettes account for less than 15% of the overall tobacco consumption (by weight) in the country, they contribute about 75% of the total tax revenue from the tobacco sector accruing to the exchequer. On the contrary, other forms of tobacco are lightly taxed in India, and in some cases are even tax exempt, leading to a high degree of potential tax loss.

The domestic cigarette industry is confronted with the challenges of discriminatory and punitive taxation coupled with a growing incidence of smuggling and illegal manufacture.

These challenges were further compounded during the year by the steep increase of 22% in cigarette Excise Duty rates announced in the Union Budget 2012 and the arbitrary increases in Value Added Tax (VAT) on cigarettes by some States. The sharp increase in Excise Duty on cigarettes in the Union Budget 2013 will further exacerbate the problem of discrimanatory and high taxation on cigarettes.

Such arbitrary and exorbitant increases not only undermine the legal domestic cigarette industry and sub-optimise revenue potential from this sector but also fail to achieve the objective of tobacco control in the country.

The policy of high and discriminatory central and state taxation on cigarettes has also led to the rapid growth of the illegal cigarettes segment. This segment has grown exponentially from 11 billion sticks in 2004 to 22 billion sticks in 2012, of which, 2 billion sticks have been added in the last year alone.

The imposition of discriminatory and punitive VAT rates by some States provides an attractive tax arbitrage opportunity resulting in illegal inter-State diversion of stocks by criminal elements, thus depriving the State Governments of their legitimate revenue share.

Various reports have highlighted the link between cigarette smuggling and organised criminal syndicates as well as terrorist organisations, which utilise the funds for anti-social and unlawful activities. If not reined in quickly, illegal cigarette trade has the potential of destroying the country’s social fabric.

ITC’s Initiatives

ITC will continue to engage with policy makers through industry associations for a balanced regulatory and fiscal framework for tobacco, equitable and harmonious VAT rates across States and implementation of a uniform GST rate.

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, efficient supply chain and distribution infrastructure and sustained investments in R&D.

Impact on Livelihoods of Farmers

Tobacco continues to be a viable and remunerative crop for farmers in the regions where this crop is grown, given the prevailing agro-climatic nature and soil conditions of these regions. It gives farmers an assured income and good institutional support is also available for this crop.

The disproportionately high taxation on cigarettes fuels transborder smuggling, leading to a reduction in domestic demand and impacts the market price for the farm produce. This 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 depend on the tobacco crop.

Given the high degree of dual consumption of tobacco in the country, a large differential in tax incidence between cigarettes and other tobacco products has rendered the demand for cigarettes highly price elastic and are driving consumers to shift to cheaper and revenue inefficient forms of tobacco leading to suboptimisation of revenue collections.

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 that was being used in the manufacture of non-filter cigarettes witnessed a fall in prices (over 20%) during the 2010 market season, thereby hugely affecting the income of tobacco farmers.

Increasing volumes of smuggled foreign cigarettes also result in the decline in demand for Indian tobacco since these cigarettes do not use tobacco grown by Indian farmers. On the other hand, illegal cigarettes produced in India use tobacco of dubious and inferior quality. Consequently, the proliferation of duty-evaded cigarettes leads to a drop in demand for high-quality Indian tobacco, thereby adversely impacting the income of farmers engaged in the cultivation of tobacco in the country.

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