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Tax Shock Threatens Sustainability of India’s Legal Cigarette Industry
Tobacco Taxes: The 28-40% GST on cigarettes and the new excise duty structure have increased prices, increasing the risk of illicit trade. Experts say consumers may shift away from expensive legal cigarettes and turn to illegal alternatives. In the long run, the legal industry and the government's tax revenues could also be affected.
The 28-40% GST rate on tobacco products, coupled with the 40-50% tax increase and the new excise duty structure, sparked worries over the rising menace of illegal cigarettes in India after the taxation increase. According to Kotak Institutional Equities, the unscheduled increase in taxes on cigarettes runs counter to the taxation approach adopted over the past eight years to aid the industry against illegal cigarettes.
According to the report, this increase in taxes could lead to an increase in illicit trade. An unexpected increase of more than 35 percent will impact prices. This will increase the trend towards illegal trade and products, negatively impacting the growth prospects of the legal industry in the long term.
Large price variations give the consumer a perception of value for money. Cost-conscious consumers will find illegal drugs more attractive if there is a considerable price difference. Citing the Tobacco Institute of India (TII), Jefferies said that the price difference could benefit non-taxable cigarettes, resulting in a loss of tax for the government. Legal cigarettes account for 10 percent of tobacco consumption, while they contribute 80 percent of total taxes. Therefore, promoting illegal cigarettes would result in a significant loss of tax.
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Nomura also stated, "Higher taxes on cigarettes, intended to reduce consumption, encourage illegal cigarettes, and consumers turn to cheaper, more tax-free smuggled cigarettes." Despite increases in tax rates from 2012-13 to 2017-18, revenue remained roughly the same as sales of legal cigarettes declined and those of illicit cigarettes increased. Taxes have stabilized since 2017-18, which has slowed the growth of illicit trade. Consequently, such a sudden increase in taxes will likely encourage further illicit trade.
