India: Cigarette, Tobacco Industry Expectation from Budget

Source from:  Sahara Samay 02/21/2013

Tobacco Industry in India contributes in a unique manner to several important facets of the Indian Economy, covering revenue, export, employment, and GDP growth. The Tobacco industry in India mainly covers manufacturing of cigarette, bidi, cigar and cheroot, hookah, snuff and other chewing Tobacco like zarda, gutkha and other pan masala.

Cigarette Industry in India is essentially capital intensive in nature. The growth of cigarette industry both in domestic and international market represents a big revenue  opportunity for the economy. But the burden of Tobacco tax has increasingly shifted to cigarette with the removal of duty on raw Tobacco since 1979, resulting in discriminatory rates of duty compared to other Tobacco products.

India's share in world cigarette production has remained at around 1.7% whereas India's exports of around 2.8 billion sticks of cigarette per year accounts for less than 1% of the world export of cigarette. There is significant opportunity for cigarette industry to extent and consolidate its position in international market due to withdrawal/reduction of agricultural subsidy and escalating cost in the traditional cigarette exporting countries.
 
Budget Expectation on Cigarette/Tobacco Industry:
 
Bidi industry is one of the foremost cottage industries in India. Almost one third of Tobacco production in India goes to bidi making as per Indian Market Research Bureau (IMRB) report . The social significance of bidi industry derives from the fact that it generates more employment in the economy compared to cigarette industry. There is scope for development of bidi industry in view of excessive and biased tax treatment of cigarette.
 
Amongst the largest producers of tobacco in the world, India stands second after China. However, the adversity is India's standing in export of tobacco. India stands at ninth largest exporter of tobacco and tobacco products in the world despite being second in largest tobacco producer of the world. Furthermore, out of the total tobacco produced in India, only one-third tobacco is suitable for cigarette manufacturing. Most of the tobacco produce is suitable for the manufacture of chewing tobacco, bidis and other cheap tobacco products, which have no demand outside the country. In India, three major cigarette players dominate the market, primarily ITC with more than 50% market share, Godfrey Phillips and VST are two major players after ITC
 
Budget Expectation: We recommend following proposals for the Cigarette/Tobacco Industry for Union Budget 2013.
 
1. Cigarette taxation under GST should be revenue neutral: GST on cigarettes should be levied at the uniform Standard Rate applicable to the general category of goods, with availability of Input Tax Credit. While central excise duty would continue to be levied, it is critical that the combined incidence of excise duty and GST on cigarettes remain revenue neutral. This could be achieved by an appropriate reduction of the existing rates of excise duty on cigarettes. Given the unsuitability of an ad-valorem duty structure for a highly taxed product like cigarettes, GST should be levied at specific rates.

2. Maintain tax stability in Excise Duty rates: Excise Duty rates should be kept unchanged to leverage the tax efficiency of cigarettes by encouraging shifts from non-cigarette forms of consumption. This, in turn, will maximize contribution to the Exchequer, even in a shrinking basket of overall tobacco consumption.
 
3. Continue with multiple price point, length based specific excise duty structure: This structure is best suited to India as it caters to the country's wide range of income  distribution and enables positioning of brands at convenient and affordable price points. It has proven to be extremely successful over the years as it has ensured increasing revenue collections in a litigation-free environment with no valuation disputes and transparent administration. Additionally, it provides for value-addition to achieve international quality standards and improved farmer earnings through usage of high quality tobaccos and increased exports.
 
4. Revise the existing length slab for filter cigarettes not exceeding 60 mm in length to not exceeding 65 mm in length with an excise duty levy of Rs.200/- per thousand cigarettes: This would expand the tobacco tax base and combat the growing menace of illicit Re. 1/- per stick filter cigarettes. It would also enable the cigarette industry to offer products at convenient and affordable price points that would address the wide range of income distribution in the country.
 
5. Contain tax evasion by unscrupulous manufacturers: To prevent revenue losses, excise duty evasion by small manufacturing units should be controlled through compulsory licensing [as required under the I(D&R)Act, 1951], stricter surveillance and harsher penalties. Enditem