The Flagrant Economic Costs
of Tobacco
BY SANYOGITA SHARMA / JULY 10, 2021
With a dysfunctional tax framework and thriving illicit cigarette trade, the legal tobacco industry in India
is in jeopardy.
he consumption of tobacco in India is dangerously excessive and has shown no signs of declining. Tobacco is consumed in a variety of forms, from smoking cigarettes and bidis to several types of chewing tobacco like gutkha. Its usage is a major cause of death and disability in India, roughly accounting for one-sixth of all tobacco-related deaths worldwide. Alarmingly, 10% of the world’s tobacco smokers are in India, representing the second largest group of smokers in the world after China and with a natural rise in disposable incomes, its demand is only expected to rise. According to the World Health Organisation (WHO), tobacco “exacerbates poverty and reduces economic productivity.” Therefore one can see as to how in most countries, tobacco use tends to be higher among the poor. Poor families end up spending a larger proportion of their income on tobacco, leaving little to no money for essentials such as food, education and healthcare, trapping them in a vicious circle of poverty. Tobacco can also worsen poverty among users and their families as tobacco consumers are at a higher risk of dying prematurely of cancers, heart attacks, respiratory diseases or other tobacco-related diseases, depriving families of stable income earners alongside imposing additional costs for healthcare.
T
Photo Credits : Unknown via The New Indian Express
With such a huge population consuming tobacco, it is therefore critical to impose a standard tax structure on the industry. Significant increases in the taxation and pricing of tobacco products is the most cost-effective measure to encourage tobacco consumers to reduce consumption while increasing government revenues. Sin tax (now GST) is a special duty levied specifically on demerit goods such as alcohol, tobacco, etc. This tax is imposed to discourage consumers from using goods or services that are seen as undesirable or detrimental to society. India however, presents a mixed landscape for tobacco taxation. Most tobacco products are taxed in India, but taxes tend to be very low for the forms of tobacco that are most commonly consumed - bidis, gutkha, and pan masala are instances of undertaxed tobacco products.
As stated in the Budget 2020, tax on bidis post-GST is only 22% compared to 53% for cigarettes. Moreover, out of the 29 states in India, only 6 have negligible taxes on bidis, with no other taxes being imposed on them. These products are thus often consumed by the poorer sections in India due to their affordability and accessibility in the absence of any regulations. Cigarettes, on the other hand, are heavily taxed in an attempt to disincentivize smokers, but this measure comes with one glaring consequence. According to a report published in August 2020 by the Tobacco Institute of India (TII), “Extremely high and constantly increasing tax rates on cigarettes provide a profitable opportunity for tax evasion thereby encouraging growth in illegal trade.”
According to the World Health Organisation (WHO), tobacco “exacerbates poverty and reduces economic productivity.”
The legal cigarette industry in India is suffering due to successive increases in taxation on cigarettes and as a result, the illegal cigarette market is booming to such an extent that India now accounts for one-fourth of the world’s illegal cigarette trade. This illicit trade of tobacco is both supply and demand driven, as consumers look to save money by turning to cheaper tobacco alternatives and illegal cigarettes; and suppliers want to take advantage of easy border entry, high profit margins, and weak repercussions if caught. The availability of illegal cigarettes has proliferated throughout the country as retailers benefit enormously by pushing sales of these cigarettes since these are offered to them at extremely low prices. A 2019 report by the Federation of Indian Chambers of Commerce & Industry (FICCI) titled “Invisible Enemy” revealed that during the fiscal year 2017-18, contraband and counterfeit goods caused the government significant and broad-based revenue losses amounting to INR 87.5 billion in the cigarettes industry. Illicit cigarette trade in India has doubled in the last decade from a level of 13.5 billion sticks in 2006 to 28 billion sticks in 2019. While during the same period, the legal cigarette industry has shrunk by around 22%, resulting in the loss of livelihood for millions of tobacco farmers.
Illicit cigarette trade in India has doubled in the last decade from a level of 13.5 billion sticks in 2006 to 28 billion sticks in 2019.
Photo Credits : Unknown
Tobacco cultivation is a labour-intensive endeavour. A vast number of agricultural labourers rely on tobacco cultivation, harvesting, and processing for their living. According to surveys conducted by the National Sample Survey Organization (NSSO), the direct and indirect tobacco workforce was estimated to be over 7 million in 2004-05 in India alone, accounting for around 1.5% of total employment. This comprises full-time and part-time employment in tobacco growing, manufacture, and the retail sector. Rural employment in this industry accounts for more than two-thirds of total employment, however, many of these jobs, notably in bidi manufacturing, are primarily part-time. India is the world’s second-largest producer and a major exporter of tobacco. The Tobacco Institute of India (TII) pointed out that tobacco products generate tax revenue worth INR 430,000 million annually. These figures reflect the importance of tobacco cultivation as a means of livelihood and revenue generation. However, illicit cigarettes adversely impact the demand for domestic tobacco since contraband products do not use locally-grown tobacco.
Photo Credits : John Holcroft via Pinterest
The Cigarettes and Other Tobacco Products Act (COTPA) Amendment Bill, 2020 further aggravates the situation. The COTPA Amendment was proposed by the Ministry of Health and Family Welfare and disallowed retail sale of loose cigarettes and prohibited sale of tobacco products to persons below 21 years. It also put controls on in-shop advertising and promotion. A webinar conducted on the occasion of ‘World No Tobacco Day’ 2021, discussed the bill and its impact on consumers and the livelihood of small retailers. It also highlighted how the proposed amendments may not bring a significant change in the consumption habits of tobacco users. The panel of consumer policy experts, healthcare professionals and farmer union leaders, unanimously agreed that a ban on loose cigarettes would only push consumers to shift to full cigarette packs and cheaper tobacco alternatives of inferior quality (eg., bidis, gutkha, pan masala), thereby increasing tobacco consumption. Noting that as of May 23, 2021, unemployment rate in the country has gone up to 14.7% (Centre for Monitoring Indian Economy, 2021), these changes would only benefit modern retail outlets at the cost of small retailers who are already suffering financially due to COVID-19 induced disruptions.
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The Federation of All India Farmers’ Associations (FAIFA) has also strongly criticised the bill, claiming that the changes would harm legal cigarette sales while bolstering India’s “ever-growing illicit cigarette economy.” As pointed out by Javare Gowda, President of FAIFA , “These harsh amendments that have been proposed will terrorise retailers and traders and they would not want to engage in the sale of cigarettes. As a result, criminal syndicates that have been pushing illegal tobacco will gain ground and will flood the Indian market with illicit cigarettes.” As mentioned above, illicit cigarettes do not use domestically produced tobacco, the result thus is a loss of earnings and livelihood for millions of tobacco farmers in India.
Illicit cigarettes do not use domestically produced tobacco, the result thus is a loss of earnings and livelihood for millions of tobacco farmers in India.
Tobacco in association with increased severity and death in hospitalised COVID-19 patients is only further tainting the industry’s bad reputation. Tobacco companies are also facing a potential drop in sales as governments institute lockdowns and bans to slow the spread of the virus. As a result, most tobacco companies have geared up on Corporate Social Responsibility (CSR) donations to present themselves as allies of public health. However, these companies are simultaneously working behind the scenes to influence policymakers, claiming the restrictions would force consumers to defy the lockdown, drive illicit tobacco trade, harm tobacco farmers and shopkeepers, and damage state budgets in an attempt to manipulate tobacco ban policies.
The COVID-19 pandemic has revealed the inadequacies and vulnerabilities in the country’s medical management. Now, as one looks to the future, the focus needs to be as much on resilient economic growth as on addressing issues that hurt the fabric of our economic and healthcare systems. The trade in illicit or counterfeit products is one such issue that has deep and widespread ramifications. The government must recognise loopholes in tobacco control policies and consider recommendations from persons affected by it. The COPTA Draft (amendment) Bill, 2020, is a positive development towards tobacco control in the country. However, successful enforcement would require policy changes and civil engagement to spread awareness, and solicit support for the law. The failure to prioritise one’s health over immediate gratification not only has detrimental effects, but also creates a huge economic burden on society.
Keywords
tobacco, illicit trade, tax evasion, demerit goods, FICCI, labour-intensive, TII, tobacco ban, COPTA, Corporate Social Responsibility, FAIFA, Invisible Enemy
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References
BW Online Bureau. (2021, May 31). Regulate Unorganised Tobacco Trade And Bring in Equitable Taxation Policies to Safeguard Indian Consumers from Inferior Quality Tobacco Products: Experts. BW Businessworld. http://www.businessworld.in/article/-Regulate-Unorganised-Tobacco-Trade-And-Bring-in-Equitable-Taxation-Policies-to-Safeguard-Indian-Consumers-from-Inferior-Quality-Tobacco-Products-Experts/31-05-2021-391460/.
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John, R. M., Rao, R. K., Rao, M. G., et al., (2010). The Economics of Tobacco and Tobacco Taxation in India. Paris: International Union Against Tuberculosis and Lung Disease, 1–50. https://www.tobaccofreekids.org/assets/global/pdfs/en/India_tobacco_taxes_report_en.pdf
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FE Online. (2021, May 31). Proposed bill to amend law on cigarettes, tobacco products to aggravate job crisis: FAIFA. The Financial Express. https://www.financialexpress.com/economy/proposed-bill-to-amend-law-on-cigarettes-tobacco-products-to-aggravate-job-crisis-faifa/2262436/.
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Zatoński, M., Gilmore, A. B., & Hird, T. R. (2020, May 10). The two faces of the tobacco industry during the COVID-19 pandemic. Blog Tobacco Control. https://blogs.bmj.com/tc/2020/05/10/the-two-faces-of-the-tobacco-industry-during-the-covid-19-pandemic/.
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Mishra, A. R. (2021, March 17). Illegal trade of cigarettes skyrockets during pandemic. Livemint. https://www.livemint.com/news/india/illegal-trade-of-cigarettes-skyrockets-during-pandemic-11615995532350.html.
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