India: Tobacco Grey Market Costs Govt Rs5,379 cr

Source from:  mydigitalfc.com 10/08/2014

The centre is losing nearly Rs 5,379 crore of indirect tax revenue per annum, thanks to illicit trade and grey market operations in the tobacco industry. Illicit trade in cigarette forms nearly 20 per cent of the total cigarette market in India, which ranks as the fifth largest market for illicit trade.

According to a recent Euromonitor study, illicit trade in India has grown by more than 43 per cent since 2007. A more recent KPMG-Assocham study said, "High taxes on domestic cigarette has led to a large demand for contraband customs duty evaded cigarette resulting in huge revenue losses."

Thanks to high taxes, the consumption pattern of tobacco products is tilting towards non-cigarette products. Besides, different VAT rates across states are providing attractive tax arbitrage opportunities, the KPMG-Assocham report said.

Citing the example of UP, the report said that where VAT rates on cigarette were raised from 17.5 per cent to 50 per cent in the Q2 of FY12-13, VAT revenue from cigarettes declined by 27 per cent, post-hike. And when the UP government reduced the VAT rates subsequently from 50 per cent to 25 per cent in May, 2013, VAT revenue grew by nearly 94 per cent. The story in Punjab was similar.

"There is need to revisit the tax landscape of tobacco industry both from achieving the overall objective of the impact relating to various forms of tobacco consumption on health as well as increasing the untapped indirect tax revenue potential from this untaxed and lightly taxed segment," said DS Rawat, Assocham. Enditem