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ITC Limited
Report of the Directors
total usage. The twin objectives of revenue maximisation
accounts for 89% of global tobacco consumption in
and tobacco control have been severely compromised
smokeless form. Cigarette consumption in India, on the
by this lopsided tax policy on cigarettes which now
other hand, constitutes only 1.9% of global consumption.
contributes over 74% of tax revenue, whilst accounting
This pattern of tobacco consumption is contrary to global
for less than 15% of tobacco consumption. Further,
trends, including that of our neighbouring countries,
the tax arbitrage opportunities have fuelled the rampant
where cigarettes are the dominant form of tobacco
growth of illegal cigarettes.
consumption.
The steep hike in Excise Duty rates announced in the
The domestic legal cigarette industry is faced with the
Union Budget 2012 will further exacerbate the problem
growing menace of illegal cigarettes. Independent
of discriminatory and high taxation on cigarettes within
research indicates that, in India, whilst there is a fall in
the tobacco industry.
volumes of duty paid' cigarettes by 4.4% during the
The year under review also witnessed arbitrary and
period 2005 to 2010, the 'duty-not-paid' volumes grew
steep hikes in VAT rates on cigarettes by many States.
by 49.3% during the same period. India has now been
This is a complete departure from the principles of
recognised as one of the leading destinations for illegal
uniform VAT rates enunciated by the Empowered
cigarettes
Committee in its White Paper on State level Value Added
Attractive tax arbitrage opportunities, as a result of high
Tax. Further, several States continued to levy
level of taxes on the legal domestic cigarette industry in
discriminatory and higher rates of VAT on cigarettes
India, incentivises illegal flow of cigarettes into the
compared to other tobacco products, thereby widening
country, especially of internationally advertised and
the tax gap amongst tobacco products. A plethora of 29
known brands.
different tax rates are currently applicable on cigarettes
across States in India which has forced manufacturers
Another dangerous outcome of the increasing volume
to adopt State specific pricing. Not only will this result
of illicit trade is that it encourages the entry of organised
in unproductive costs in managing supply chain
criminal syndicates, which can have serious law and
complexities but also lead to potential disputes in the
order consequences for the country. Internationally, it
assessment of ad-valorem taxes. The imposition of
has been reported that illegal profits from cigarette
non-uniform VAT rates by States also goes against the
smuggling have been used to fund terrorist activities.
tenets of the draft National Competition Policy, which
Coupled with our porous borders, cigarette imports under
recommends a 'single national market' in line with the
Open General License (OGL) make it extremely difficult
principle that fragmented markets impede competition.
to monitor and regulate the inflow of illegal stocks.
In addition, the resultant attractive tax arbitrage
Further, with the domestic cigarette industry being strictly
opportunity promotes illegal inter-State diversion of
regulated, including compulsory licensing under the
stocks by unscrupulous elements thus depriving the
Industrial (Development & Regulation) Act, 1951, a liberal
Government of revenue and diverting trade away from
import policy is contrary to the Government's tobacco
legitimate distribution channels.
control policies. This is also detrimental to the interests
The findings reported in the Global Adult Tobacco Survey
of Indian tobacco farmers, as it directly impacts the
(GATS) India, 2009-10 study, conducted under the aegis
demand for indigenous tobacco by the domestic industry.
of the Ministry of Health & Family Welfare, shows that
The demographic construct of India's population calls
whilst the consumer base of tobacco in India stands at
for multiple price points to meet the needs of the country's
34.6% of all adults, the cigarette share is only 5.7%.
diverse consumer segments. The growth of illegal
About 75% of Indian tobacco consumers consume non-
cigarettes is also aided by the vacuum created at lower
smoking tobacco products mainly in the form of oral
price points, where legal industry has been unable to
chewing products which constitutes the single largest
operate, due to a disproportionately high tax burden.
consumer base for tobacco products in India. It may be
Further, the lacunae in the provisions of the Industrial
noted that India, with 17% of the world population,
(Development & Regulation) Act, 1951 encourages
Attractive tax arbitrage opportunities, as a result of
high level of taxes on the legal domestic cigarette industry in India,
incentivises illegal flow of cigarettes into the country.
ITG Report and Accounts 2012
Source: https://www.industrydocuments.ucsf.edu/Goes/mox02 2s
39

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