The experience of over six years of FICCI CASCADE (Committee Against Smuggling and Counterfeiting Activities Destroying the Economy) has amply revealed that the problem of illicit trade is grave and is aggravating at an accelerated pace.
The experience of over six years of FICCI CASCADE (Committee Against Smuggling and Counterfeiting Activities Destroying the Economy) has amply revealed that the problem of illicit trade is grave and is aggravating at an accelerated pace. Preventive measures, taken so far, to check this menace by the policy makers and enforcement agencies are not proving enough to contain the problem. It is noticed that across the globe illicit networks are infiltrating and corrupting legitimate business markets, reducing productivity, dis-incentivising investments in research and development—not to mention, jeopardising public health and eroding government revenue and national security.
It is a matter of concern for India, where rapid technological advancement and economic liberalisation have opened up avenues for the growth of a parallel economy dominated by illicit goods and services. A study by FICCI CASCADE has revealed the magnitude of illicit trade to be way beyond the common perception. In seven manufactured products of common consumption, the supply of unaccounted and untaxed goods increased by 44.4% in just two years between 2012 and 2014. As a result, genuine producers collectively suffered a sales loss of Rs 1,05,381 crore in 2014 while government’s loss in tax revenue was Rs 39,239 crore. Out of this the maximum loss of revenue of `9,139 crore was in tobacco sector. According to the report, the share of grey market in tobacco products increased from 15.7% to 20.2% in these two years. Smuggling of cigarettes has also shown an increasing trend over the years and it is among the top-5 smuggled items in the country. The DRI seizures of smuggled cigarettes during last three years have been Rs 90.75 crore in 2014-15, Rs 162 crore in 2015-16 and Rs 78 crore in 2016-17.
Watch this also:
In view of this situation of illicit trade in cigarettes, there is an immediate need for the government to have a relook at its taxation policy of this item. They have to adequately address two main concerns namely curbing the consumption of such goods which are harmful to health and at the same time, not to peg the rates at such high levels which incentivises illicit trade through tax arbitrage.
The government has done a commendable job with regard to revenue neutrality by not experimenting with cigarette taxation in GST. If we look at the history of taxation of cigarettes, we find that till February 1987, they were taxed under an ad valorem structure. However, in view of the unending valuation disputes it was realised that taxing this item based on value is not the right approach. Hence, a length-based, specific duty structure was introduced. This new structure catered to India’s wide income distribution through multiple length slabs, providing consumers with alternative price points based on their ability to spend. This one step eliminated the valuation disputes and litigation. Since, this approach has worked well so far, it would be desirable to continue the same under GST also.
While taking a final view about the rates under GST on different tobacco products, it should be borne in mind that no product should become more easily accessible at cheaper price. Among tobacco products, cigarette is manufactured under hygienic and standardised conditions using better quality tobacco. Whereas, bidis are made at small scale, follows no quality standards and may cause consumers greater harm. Despite this, it is being argued that they should be under lower tax bracket. However, as a result of this policy consumption of bidis is eight-fold higher than that of cigarettes. Low taxation on bidis, results in people shifting from cigarettes to other cheaper forms of tobacco. This can be clearly understood from the fact that while tobacco consumption in India has grown from 406 million kg in 1981-82 to 562 million kgs in 2014-15, the consumption of cigarettes during the same period has declined from 21% to 11%.
There is a need to make a change in this policy under GST because if we continue with the same, a large number of people who are less educated, living in semi-urban and rural areas with little means will remain subjected to greater health hazards. As a result, the government’s spending on health care would increase substantially and a large proportion of the population will continue to be exposed to poor quality of tobacco.
It is necessary that GST council takes a holistic view in respect of taxation of tobacco products giving due weightage to different and often conflicting concerns of raising revenue, reducing tax arbitrage among different items and protecting health of the people at reduced health care cost.
By- PC Jha
Advisor, FICCI CASCADE and former chairman, Central Board of Excise and Customs (CBEC)