A few days ago, there was a rather interesting article on Moneycontrol. It said — “The value of illegal cigarettes seized in the first 11 months of FY21 has spiked to Rs 1,772 crore from just Rs 187 crore in FY20, according to figures made available by the Central Board of Indirect taxes and Customs (CBIC).” And while the article does go on to explain why this might have been the case, we thought we could offer you more context by explaining why cigarette smuggling is so rampant in the first place.


The Story

Cigarettes are taxed heavily in India. There’s a GST of 28%. Then there is the GST compensation cess — an extra charge levied on cigarettes to compensate those states who lost out on tax revenues (after the introduction of GST). And finally, there is the National Calamity Contingency Duty — another charge added to shore up our National Disaster Fund.

In fact, as a report from the Tobacco Institute of India notes — "Cigarette taxes in India are almost 12 times higher than in the USA; 9 times higher than Japan; almost 6 times more than China; 5 times higher than Germany; 3 times more than in Australia, UK & Malaysia and 2 times higher than Pakistan and Thailand."

The government however will argue that this is only a rational exercise. After all, the consumption of sin products is detrimental to your cause. So higher taxes ought to disincentivize you from smoking. But things don’t always play out this way. When you have a tax arbitrage, people will try to game the system. Think of it this way. If cigarettes don’t cost as much in the US for instance, then there is an incentive for a US resident to ship them to India. However, our country also imposes punitive duties on imports. And that means the only way to reap the benefits of this price differential is to smuggle them. It’s a low-risk high reward program and it’s fairly easy to execute.

People constantly ship cigarettes to India, by not declaring them as such. These products don’t get taxed like they ought to and are therefore made accessible in India at very competitive prices. Once they reach India, people use trains to transport the smuggled contraband to different parts of the country. And as the Directorate of Revenue Intelligence notes — “smuggled cigarette brands find a ready market in the country with existing demand, easy accessibility and cheaper prices compared with domestic legal cigarettes”

The Tobacco Institute of India even argues that a quarter of all cigarettes sold in India are contraband. They believe that over the last three decades, tobacco consumption has increased by 33%, while the share of legal cigarette consumption has declined from 21% to 10%.

Bottom line — People are still smoking cigarettes while smuggling continues to thrive. The only caveat though is a lot of this consumption isn’t taxed by the government. So maybe there is significant merit in reducing taxes. However, that might not also play out the way we intend.

As another paper notes 

"Smuggling is more prevalent in “cheaper” countries, and where taxes have been reduced, such as in Canada... There are, however, countries that have solved the problem by better control, Spain being the most impressive example to date."

So the argument goes that we need better enforcement to curb smuggling. Not fewer taxes. And if the article from Moneycontrol is anything to go by, that’s precisely what seems to be happening right now. As the report notes —

“The government has, over the past two years, cracked down on unauthorised cigarette brands, which are mostly smuggled in from China, Malaysia and Dubai. The CBIC and the Directorate General of Revenue Intelligence (DGRI) have been tasked with keeping a constant vigil on the illicit import and smuggling of cigarettes.”

So yeah, we finally seem to be making some progress on curbing this menace once and for all, and now you know how.

Until next time...

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