Tax hike raises risk of smuggling of tobacco products and revenue loss for govt: Experts
An unprecedented tax hike, coupled with a new excise duty structure on tobacco, could lead to a surge in illicit trade of cigarettes and result in significant tax revenue losses for the country, experts said.
Earlier this week, the finance ministry notified amendments to the Central Excise Act, imposing an excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks based on cigarette length, effective February 1. This duty will be over and above 40 per cent GST.
This would imply the overall tax hike of 60-70 per cent, varying across lengths. Currently, the overall tax of about 50-55 per cent, depending on the length.
The unexpected tax hikes proposed in the transition from the GST compensation cess to excise on demerit goods have triggered concern of increased smuggling of tobacco products and cigarettes, Think Change Forum Secretary General Ranganath Tannir said.
"Public finance theory is clear that excessive taxation of inelastic goods fuels illicit trade, not compliance. This risk is amplified in India, where cigarettes are already among the most unaffordable globally, as measured by the WHO's affordability indicators. Making them even more expensive will not suppress demand, but redirect it-- most likely towards smuggled and illegal products -- undermining revenue," he said.
According to global financial firm J P Morgan's Asia Pacific Equity Research report, a higher rate for the King Size Filter Tip (KSFT) segment implies increased risk of consumer downtrading to cheaper variants, and may also induce an increase in the offtake of illicit cigarettes.
