Karnataka is emerging as a big market for illegal cigarette trade in the country. These locally manufactured, tax-evading cigarettes have an impressive share of the cigarette market, which is steadily growing in the state.
According to the Euromonitor's report (leading agency in tracking world-wide illicit trade), the illegal cigarette trade is an alarmingly large and well-organised business with some of country's largest manufacturers of illegal cigarettes (based outside the state) supplying more than three crore illegal cigarettes in the state every month. Consequently, the government suffers an annual tax loss of more than Rs60 crore.
The harsh taxation on cigarettes in the country is the key reason for the huge and growing market for illegal cigarettes. Despite accounting for a meagre 15% share of total tobacco consumption, cigarettes generate more than 75% of the tax revenue from tobacco.
According to Euromonitor's report, India is the world's sixth largest market for illicit cigarettes and is also one of the fastest growing. In the last five-six years, illicit trade of cigarettes has grown by almost 60% and it commands 16% of the Indian market, which is, probably, bigger than the second biggest cigarette company in the country. As per the survey's predictions, in the next few years, share of illicit trade in the country may reach up to 23% of the Indian market from current 16%.
Although, the category of 'illicit cigarettes' includes smuggled international brands, it comprises principally duty-evaded cigarettes manufactured domestically by small, unscrupulous units. These units do not pay the high excise and VAT levied on cigarettes, and conduct flourishing clandestine businesses. Due to tax-evaded/illegal trade in cigarettes, the national exchequer suffers an annual revenue loss of around Rs4000 crore.
In Karnataka, the state-level taxes on cigarettes are 19% (VAT 17% plus entry tax 2%), which is much higher than the VAT of 12.5% introduced across all states in 2007. "Hence, evading tax payment on cigarettes becomes a particularly inviting proposition in the state," the report said.
The illegal cigarettes have gained tremendous momentum after the Union Budgets of 2008 09 and 2010-11, when central excise duty rates increased by an unprecedented 42%. Legitimate cigarette manufacturers were forced to vacate the hitherto affordable price points of Rs1 and Rs1.5 per stick, and the vacuum was rapidly filled by illegal-tax-evaded regular-size filter cigarettes, which began to be sold to consumers at Rs1 per stick. Illegal cigarettes are thus available to consumers at the price of bidi. Though, the MRP on illegally manufactured cigarette packs is Rs18-20, they are often sold at Rs6 to Rs10 per pack. Large section of consumers finds these prices irresistible, and this has helped certain illegal brands to establish themselves as the 'common man's brand'. Compare with this the legal pack, which is available for Rs25 per pack or even higher owing to high Central Excise duty and high state level taxes (19%) in the state.
In Karnataka, illegal brands such as Shalimar, No 10, Cool, Tip Top have emerged as big players with a massive consumer base. These brands are readily available at marketplaces, retail outlets and hawkers' stalls. Indeed, cigarette sellers prefer to stock these brands as their low prices and illicit nature of trade ensure higher trade margins. "Often, the manufacturers and distributors of illegal cigarettes tend to be members of the local mafia," it said.
Loss of revenue
The loss of revenue to the state government because of the illegal cigarettes trade is staggering. "But the cost to the health of smokers of illegal cigarettes is incalculable. Illegal cigarettes pose high health hazards to smokers because of the inferior manufacturing process used, the low-quality tobacco and high levels of nicotine. One can easily imagine what is going inside these kind of cigarettes which are sold at low rates in inflationary times like this," it said.
The trade of illegal cigarettes in Karnataka and other states in the country has been growing rapidly. It clearly shows that the high and discriminatory tax policy against cigarettes does not decrease overall tobacco consumption, and neither does it lead to a higher collection of taxes. "It simply catalyses the growth of the illegal cigarettes trade, and compels people to switch to cheaper illegal cigarettes or other cheap tobacco products, which are far more harmful than legally manufactured cigarettes," it said.