How India’s High Cigarette Taxes Fuel the Illicit Tobacco Trade

Background of Cigarette Taxes fuel

In India, the cost of smoking goes far beyond the price of a pack of cigarettes. With one of the highest cigarette tax rates in the world, India stands out not just for its strict tobacco regulations but also for the unintended consequences that these punitive taxes bring. 

While the government aims to curb smoking through heavy taxation, the result has been a rapid rise in illicit cigarette trade, making India the fourth-largest market for illegal cigarette globally. This shift from legal to illicit products not only impacts public health but also deprives the government of significant tax revenue. 

In this blog, we’ll explore how high cigarette taxes in India are shaping the tobacco market, driving consumers to cheaper and often illegal alternatives, and what this means for the country’s future.

In recent times, a business that had been growing steadily started to see a slowdown. The high demand they once enjoyed began to level off, as overall consumer interest in their market dipped. Adding to their challenges was the ongoing issue of illicit trade, which continued to be a big problem.

Despite these difficulties, the company managed to find some bright spots. Their premium and unique products were still in demand, showing strong sales throughout the year. 

The company’s success in the cigarette industry didn’t happen by chance. They remained focused on building a strong lineup of top-quality products. 

This approach was supported by their entire process, from the very beginning with seed selection to the final product. They also had a deep understanding of what their customers wanted, which helped them innovate and create products that stood out.

To fight against illicit trade and protect their position in the market, the company worked hard to improve their product range. 

They introduced new options under well-known brands like Classic, Gold Flake, American Club, and Bristol. They also expanded their reach in key markets, offering new choices across different segments.

During the year, the company strengthened its presence in important areas. They made sure their products were available in more places, especially in rural and semi-urban markets. 

By focusing on these areas and making smart investments in their product lineup, they positioned themselves well for the future.

Cigarette are the most common form of tobacco use worldwide. In India, however, tobacco is used in many different ways, both for chewing and smoking, and these products are available at various prices. This is largely due to high and uneven taxes on cigarettes. 

While India is the second-largest consumer of tobacco globally, only 9% of the country’s tobacco consumption comes from legal cigarettes, compared to a global average of 90%.

India’s situation is unique. Even though the country has 18% of the world’s population, it accounts for less than 2% of global cigarette consumption. This means that per capita cigarette use in India is among the lowest in the world. 

Over the years, high taxes on cigarettes have pushed many people to switch from duty-paid cigarettes to other, often cheaper, forms of tobacco like illicit cigarettes, bidi, chewing tobacco, gutkha, zarda, and snuff.

As a result, even though legal cigarettes now make up only 9% of all tobacco consumed in India (down from 21% in 1981-82), the overall use of tobacco has actually increased during this time. 

Despite being such a small part of tobacco consumption, duty-paid cigarettes still contribute more than 80% of the revenue from the tobacco sector.

In India, taxes on cigarettes are significantly higher compared to other countries. For every 2,000 cigarettes, the tax as a percentage of per capita GDP in India stands at 5.71%. 

This rate is incredibly steep when compared to other nations. For instance, the tax in India is about 14 times higher than in the USA, 7 times higher than in Japan, and 6 times higher than in Germany. Even when compared to neighboring countries like Pakistan and Bangladesh, India’s cigarette taxes are much higher.

Despite this high taxation, India’s per capita cigarette consumption remains among the lowest in the world. It is significantly lower than in countries like China, Japan, the USA, and the UK, as well as neighboring countries such as Bangladesh and Pakistan.

India’s cigarette industry has faced significant challenges due to high taxes. Compared to other countries, India’s tax on cigarettes is much higher, making it about 14 times that of the USA, 7 times higher than Japan, and 6 times more than Germany. 

This heavy taxation has had a significant impact on cigarette consumption in the country. Despite these high taxes, India’s per capita consumption of cigarettes is among the lowest in the world, with just 90 cigarettes consumed per person each year. This is much lower compared to countries like China, where the per capita consumption is 1,971 cigarettes, or Japan with 1,133 cigarettes per person.

Historically, steep increases in taxation have adversely
impacted tax collections and legal cigarette volumes,
while a stable tax regime has led to buoyancy in tax
collections as evidenced in the table below:

These high taxes on legal cigarettes have not only discouraged legal consumption but have also led to a rise in the illicit cigarette market. India is now the fourth-largest market for illicit cigarettes in the world. This growth in illicit trade is largely due to the significant tax difference between legal and illegal products, which has created lucrative opportunities for those involved in illegal trade. Over the past decade, while the volume of legal cigarettes has declined, illicit cigarette volumes have grown rapidly, now accounting for about one-third of the legal industry’s size.

The government and enforcement agencies have taken steps to counter this illicit trade. Extensive media reports highlighted numerous cases of tax evasion by dealers in illicit cigarettes, uncovered through raids conducted by the Directorate of Revenue Intelligence (DRI) and other agencies. 

A study by FICCI-TARI in September 2022 noted that as taxes on cigarettes increase beyond a certain point, consumers tend to shift towards cheaper, often illegal alternatives. This shift has resulted in an estimated annual revenue loss of around ₹21,000 crores for the Indian government.

The DRI’s report on “Smuggling in India 2021-22” acknowledges that the high taxes on cigarettes create opportunities for illicit trade. Smuggled cigarettes, which do not pay taxes and do not carry the required health warnings, are often sold at prices 50% lower than similar legal brands. This not only hurts the legal industry but also poses serious public health risks, as many of these smuggled cigarettes are of inferior quality and may be counterfeit.

India’s tobacco control measures are some of the strictest in the world. The Cigarettes and Other Tobacco Products Act (COTPA) of 2003 requires that cigarette packages display health warnings that cover 85% of the packaging, one of the largest in the world. However, smuggled cigarettes often do not carry these warnings, or they have much smaller warnings as per the laws of the countries they are smuggled from.

Despite these challenges, the legal cigarette industry in India continues to fight back, improving its product offerings and working closely with enforcement agencies to reduce illicit trade. 

The company’s focus on innovation, expanding its product range, and improving distribution, especially in rural and semi-urban markets, has helped it maintain its position in the market. While the road ahead is challenging, the company’s efforts to counter illicit trade and meet consumer demands provide hope for the future.

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