Can India's new tobacco tax fuel cigarette smuggling?
What's the story
Experts have warned that a recent tax hike and new excise duty structure on tobacco could lead to an increase in cigarette smuggling and major revenue losses for the Indian government. The Finance Ministry recently amended the Central Excise Act, imposing an excise duty of ₹2,050-₹8,500 per 1,000 sticks depending on the length of cigarettes. This will be in addition to a 40% GST.
Concerns raised
Experts warn of increased smuggling due to tax hikes
The unexpected tax increases have raised fears of a spike in tobacco product and cigarette smuggling. Ranganath Tannir, Secretary General of Think Change Forum, said, "Public finance theory is clear that excessive taxation of inelastic goods fuels illicit trade, not compliance." He further noted that India already has some of the most unaffordable cigarettes globally as per WHO's affordability indicators.
Market impact
Tax hikes could lead to consumer downtrading, illicit trade
A report by JP Morgan's Asia Pacific Equity Research highlights that a higher rate for the King Size Filter Tip (KSFT) segment could lead to consumer downtrading to cheaper variants, and possibly increase the consumption of illicit cigarettes. In India, illicit tobacco already accounts for about 26% of the total tobacco market, making it the fourth-largest market for smuggled tobacco globally.
Unintended consequences
High taxes may inadvertently fuel illicit cigarette growth
Nomura, another brokerage house, has also observed that "high taxes on cigarettes, while aimed at reducing consumption, have unintended consequences of fuelling growth of illicit cigarettes and pushing consumers toward cheaper, non-tax paid smuggled cigarettes." Jefferies cited a report by the Tobacco Institute of India (TII) which requested the Centre for a review as a wider legal price gap could benefit non-duty-paid cigarettes leading to tax leakage.
Global perspective
Australia's experience shows aggressive taxation can backfire
The case of Australia shows how aggressive tobacco taxation can backfire by fueling organized crime. Repeated tax hikes between 2012 and 2020 led to a sharp rise in cigarette prices and an increase in illicit tobacco from under 2% to around 14% of the market. An analyst commented on India's new excise levies, saying, "there is still time to revisit and rectify them before they spawn a much larger problem of uncontrollable illicit networks."