HP illegal cigarette industry 20% of total market: FICCI CASCADE

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NewZNew (Shimla) : FICCI CASCADE (Committee against Smuggling & Counterfeiting Activities Destroying the Economy), unveiled its nine sector report titled – ‘Illicit Market: A Threat to Our National Interest’ at a hotel here today.

This is a quantitative study evaluating the impact of illicit markets on various economic aspects in the Manufacturing Industry including sectors like FMCG Packaged Foods and Personal Goods, Computer Hardware, Automobiles, Mobile Phones, Tobacco & Alcohol, and secondly – the Media and Entertainment Industry including the Broadcasting and Motion Pictures sectors.

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As per the report, the total loss to the government estimated for 2014, on account of the illicit markets in respect of the seven sectors manufacturing industry is Rs 39,239 crores, up from Rs 26,190 crores in 2012.  The loss is inclusive of both indirect and direct taxes — the indirect taxes component is Rs. 34,020 crore and direct taxes is Rs. 5,218 crore. The study has also discovered that during the course of two years from 2011-12 to 2013-14, revenue loss to the Government has grown-up exponentially by Rs. 13,049 crores, an increase by 49.8%. Amongst the various sectors, the maximum revenue loss to the exchequer on account of counterfeiting and illicit trade is attributed to tobacco products at 23%, estimating a revenue loss of Rs. 9139 crores.

Himachal Pradesh has seen a significant growth in illicit trade among these sectors in the last couple of years. It is one of the fastest growing markets for illegal cigarettes and alcohol in the country. Illegal cigarette industry is estimated at more than 20% of the total cigarette market in the state. The supply of legal cigarettes shows a decline, the illegal players have taken over this market and is growing at a higher rate. In case of alcohol, the illegal market is growing significantlyin value and much higher in quantity especially for IMFL and imported liquor.These two sectors are amounting to more than hundreds of crores in loses to the Himachal Pradesh Government.

While unveiling report, Mr P.C. Jha, Adviser FICCI CASCADE and former Chairman, Central Board of Excise & Customs said that during the last twenty years, the volume of the counterfeiting activity has increased 100 times and the size of trade in counterfeited goods was 10% of the legal international trade (around 2% of the world’s overall economic output).”

Quoting the recently released FICCI CASCADE study, Mr. Jha stated that the loss to manufacturing related sectors has increased by 44.4% in the two years, from Rs72,969 crore in 2011-12 to Rs 105,381 in 2013-14.

The study also establishes a relationship between high taxes and availability of illicit products.  High tax rates tend to exacerbate illicit markets by creating greater demand for cheap and counterfeit substitutes. A significant reason for this being that high tariffs and taxes create opportunities for those involved in illicit markets to step in and supply ‘reduced’ versions of the original product at lower prices. This is true for the tobacco and alcohol Industry. These industries are not only highly taxed; the tax structure is highly complex in nature. Besides, there are considerable differences in tax rates between states which open up opportunities for illegal cross-border trade.

Mr Deep Chand, Adviser FICCI CASCADE and former Special Commissioner of Police, New Delhi said that in the past few decades, leading intelligence and law-enforcement agencies around the world have found conclusive evidence of the increasing involvement of terrorist organizations in counterfeiting, piracy and smuggling activities to fund their activities. While several counterfeiting outfits were transferring portions of their proceeds to terrorist organizations, some of these are set up for the sole purpose of financing terrorism. The need of the hour was tangible actions to increase enforcement and to impose increased punishments. This was imperative to reassure legitimate business owners and consumers that the government was serious about protecting right owners which, in turn, would elicit greater support for government policies.”

Mr. Sanjay Kumar (IPS), Director General of Police, Government of Himachal Pradesh also shared his views about the extent of the menace in the state and also highlighted the various initiatives taken by HP police to curb this growing socio-economic threat. He also thanked FICCI CASCADE for taking up the issue and said that the masses should say ‘NO’ to smuggled good.

Meanwhile HP has seen a significant growth in illicit trade among these sectors in the last couple of years. It is one of markets with high growth of illegal cigarettes in the country. Illegal cigarette industry is estimated to be around 22-23% of the total cigarette market in the State.Himachal Pradesh with 40% (36% VAT and 4% Entry Tax) has the highest Tax rate on cigarettes in the country. As a result theprices for legal cigarettes are high which fuels an impressive growth of illegal cigarette industry in the State. Most of the manufacturers of such illegal cigarettes(mostly based in surrounding States) evade the high Central Excise Duty and State Taxes and thus are able to offer their products to consumers at rock-bottom prices. Price of illegal cigarette pack in Himachal Pradesh is at one fifth of the price of a legal packet which makes it very attractive to consumers, particularly youth and rural population. As a result, the domestic manufacturers of legal cigarettes are at great disadvantage on prices with such illegal cigarettes which find great favours amongst consumers, particularly in semi urban and rural areas. Smuggled international contraband cigarettes are another big menace contributing significantly to the alarming growth of illegal cigarettes in Himachal Pradesh. The fact that the State is a major attraction for tourists including foreigners is also a big reason for large scale smuggling of contraband cigarettes in to the State.

Illegal cigarettes ( domestic tax-evaded plus smuggled contraband) are willingly pushed by the trade  because ofhigh trade marginson account of evasion of all kind of duties including Excise and State level Taxes(VAT and Entry Tax). Over the years, popularity of such illegal cigarettes (smuggled and domestic tax-evaded illegal cigarettes) has spread across urban and rural youth as they tend to be cheap as well as carry international brand names. Such illegal cigarettes totally defeat the tobacco control objectives of the Govt. as they neither bear any Health Warnings required as per Indian laws  nor have other mandatory declarations like MRP, Date of Manufacture or Place of Manufacture.  High Tax on cigarettes in Himachal Pradesh compared to the rest of the country has also resulted in larger scale diversion of cigarettes trade into other State. As a result cigarette traders (including small time retailers) of the state have lost their business to International and Inter-State smugglersand anti-social mafia who are involved in manufacturing of illegal cigarettes.

In this process the State is estimated to lose revenue of more than Rs 50 crores annually from the cigarette industry. Himachal Pradesh, on account of high VAT rate, is also losing revenue on account of VAT refund. A dealer buying cigarettes in the State after paying VAT @36%, can make an inter-State sale to a low VAT State against Form C at  2% CST and can  claim a VAT refund of 34% – which is a loss to Himachal Pradesh. It is thus clear that the objective of increasing revenue from the cigarette industry in the State with a steep increase in VAT has been soundly defeated. State Govt has lost heavily in revenue, traders of the State have lost their business to smugglers and anti-social elements. Tobacco control objectives are defeated and illegal traders are filling their coffers.

Several steps have been taken by FICCI CASCADE to create large-scale awareness through various initiatives organised across the country as part of a nation-wide awareness campaign to highlight the issue and focus on the growing menace of smuggling and counterfeiting. In pursuance of the CASCADE agenda, a seminar and Candle Light Congregation on ‘Curbing Counterfeiting and Smuggling – An Imperative for Indian Economy’ is being organized in the Shimla on September 30th, 2015. The seminar will be addressed by prominent representatives of industry, consumer organizations and senior government officials.