With a professional background as a qualified chartered accountant, Sharad Tandan joined India’s leading tobacco company, ITC Ltd., in 1985, in the process accumulating a wealth of work experience and developing an in-depth understanding of tobacco industry-related issues in India. In 2020, Tandan was posted as director of the Tobacco Institute of India, a representative body of farmers, exporters, manufacturers, and ancillaries of the cigarette segment.
Tobacco Asia (TA): India has long had a growing problem with illicit products swamping the market, foremost cigarettes. What was historically the peak percentage of illicit products by total annual volume, and in which year was that?
Sharad Tandan (TII): As a result of the arbitrage caused by increasingly high cigarette taxation between 2011 and 2021, illicit cigarettes grew by a huge 37% during that decade. At the same time, legal volumes experienced a significant drop, which led to the situation where illicit products eventually made up as much as one third of the legal cigarette market. According to Euromonitor International data, the illicit cigarette volume peaked in India in 2020, reaching a level of 28.1 billion sticks and representing 27.6% of the country’s total cigarette market. This makes India the fourth largest illicit cigarette market in the world.
TA: How much did that translate to in terms of lost tax revenues?
TII: The high illicit volume in India in 2020, as reported by Euromonitor, and given the prevailing rates of taxes, the government is estimated to have lost tax revenues in excess of US$1.9 billion per annum on account of illicit cigarette trade.
TA: What categories of illicit products are we talking here?
TII: There are two broad categories of illicit cigarettes that are largely found in India. The first category comprises of smuggled premium international brands and a vast range of lesser-known, low-price international smuggled cigarettes at the value end of the market. These are by far the most dominant forms of illicit cigarettes found in India; and, as is commonly known, globally often fostered by international criminal gangs. According to a June 2022 press release by India’s anti-smuggling agency under the Directorate of Revenue Intelligence (DRI), more than 100 international smuggled cigarette brands are flooding the Indian market from all over the globe. The smuggled cigarettes are approximately five times cheaper than the duty paid cigarettes. e.g. legally duty paid cigarettes would cost INR330 [approx. US$4.00] and smuggled cigarettes would cost INR60 to INR80 [per pack of 20]. The second category covers domestically manufactured brands which evade duties, taxes, and licensing requirements and therefore are available at lower prices than legal cigarettes. There are instances of illicit cigarette brands misappropriating the logos and colors of popular legal brands, passing themselves off as genuine products.
TA: What are the typical retail channels for illicit products?
TII: The distribution of tobacco in India mainly takes place in the informal sector, through small retailers who operate small shops, kiosks, pavement stalls, bicycles, and carts, even selling from floor mats under trees; and some of these outlets offer illicit cigarettes. In fact, illegal cigarettes are widely available in retail outlets in both the rural and urban areas of India.
TA: To what extent are domestic manufacturers to blame for the problem?
TII: The legal cigarette industry - mainly comprising large manufacturers - is licensed and completely compliant with all tobacco control and other regulations. However, there are instances of some small cigarette factories being set up without licenses. Some of them have been resorting to covert removal of cigarettes from their factories without payment of taxes… Moreover, these unscrupulous manufacturers sometimes even produce lookalike copies of legitimate brands, violating trademarks.
TA: Is India implementing a T&T requirement for domestic products?
TII: While India has signed the WHO FCTC’s Protocol to Eliminate Illicit Trade in Tobacco Products in June 2008, track & trace systems have not yet been implemented in India. But, as I mentioned earlier, the dominant form of illicit cigarettes are internationally smuggled cigarettes entering India from across her borders. Thus, the illicit trade protocol can succeed only when [those] countries from where illegal cigarettes originate implement the protocol along with the T&T systems required by it. In any case, the unique pictorial [health] warnings that cover 85% of legal cigarette packaging in India are already a clear differentiator between domestic legal cigarettes and international smuggled cigarettes, which are without those warnings. We believe that the protocol should be implemented simultaneously across the world.”
TA: What measures exactly are implemented by the Indian government to curb the illicit tobacco problem? And are some of these measures perhaps not put into action effectively enough?
TII: The Indian government has taken a serious view of the growing illicit cigarette trade and has addressed the menace with enforcement agencies, which are continuing their efforts in seizing illicit cigarette stocks across the country. It is, however, also important to recognize the lure to consumers of low purchasing prices for illicit products. The legal industry believes that in order to substantially reduce illicit trade, the price arbitrage also has to be reduced considerably; and this can only be achieved by reducing the tax burden for consumers, encouraging them to purchase legal cigarettes. As per the WHO report Global Tobacco Epidemic 2021, cigarette taxes in India in terms of percentage of per-capita GDP are amongst the highest in the world. With such high levels of taxation, the affordability of legal cigarettes is significantly lower [for Indian consumers] than in most emerging economies as well as many other countries such as Japan, the US, Germany, China, the UK, Pakistan, and Malaysia. In fact, India is one of the least affordable cigarette markets in the world.
TA: So what does the current taxation structure actually look like?
TII: Currently, cigarettes are subject to the highest goods and services tax [GST] rate of 28% in addition to GST compensation cess [GSTCC], basic excise duty [BED], and national calamity contingent duty [NCCD] at different tax rates or amounts, and which are based on cigarette type and length. The current tax structure came into force with the implementation of GST in July 2017 and no change in the structure is expected at this point.
TA: What role does the Tobacco Institute of India play in the battle against illicit products?
TII: The Tobacco Institute of India is a representative body of farmers, manufacturers, exporters, and ancillaries of the cigarettes’ segment of the tobacco industry in India. The Institute is recognized as a repository of reliable information on the industry and is privileged to be consulted by the government, parliamentary committees, chambers of commerce, trade associations, and the media for information and policy recommendations on tobacco issues. Regarding the illicit trade issue, the institute has been persistently communicating with the concerned ministries and enforcement agencies, calling for urgent steps to contain its unrestrained growth. The institute has emphasized that the growth in illegal trade has serious unintended consequences, including huge losses in government revenues and an adverse impact on tobacco farmers’ earnings. Cigarettes’ high taxation and extreme regulations have proven counter-productive. They are merely shifting demand from legal tax-paid and regulation-compliant products to illegal tax-evaded and non-compliant products, with no reduction in overall consumption. On the contrary, overall tobacco consumption in the country continues to increase year-on-year.
TA: Have the government’s efforts shown any results?
TII: The government’s constant monitoring and several enforcement measures have indeed allowed the legal cigarette industry to recover small volumes previously lost to the illicit trade. It seems that for the first time ever, the growth momentum of illicit cigarettes in the country has been stifled. According to Euromonitor International, the illicit cigarette volume in India was 26.8 billion sticks in 2021 compared to 28.1 billion sticks in the year prior; so that is a drop of around 5%.
TA: What is important to do now in order to maintain that momentum and avoid prevent a relapse or reversal?
TII: Legal cigarettes have been subjected to punitive and discriminatory taxation over the years, leading to diminishing returns. In the past it has been shown that optimal tax rates help realize better government revenues as well as help in curb the illicit trade and tax evasion. But the [recent] reversal in the illicit volume growth may be short-lived unless the unafford-ability of legal cigarettes is addressed and the price differential between legal and illegal cigarettes is reduced. We strongly feel that the government should consider a policy correction by reducing the taxes on cigarettes to disincentivize the illicit trade and provide an opportunity to the legal industry to further recover lost volumes. This would go a long way in overcoming the counterproductive results brought on by excessive taxation increase over the past decade and at the same time shore up tax revenues for the government.