This is an audio transcript of The Morning Brief podcast episode: Smuggling smokes: The booming black market for cigarettes in India 

BG Sound  

This is the morning brief from the economic times. This episode discusses tobacco and cigarette trade, but does not endorse or promote the use or sale of tobacco in any form consumption of cigarettes and other tobacco products is injurious to health. 

Dia Rekhi  

It's slim, sleek, smelled cheaper, but smuggled.One out of every four smokers in India are smoking an illegal brand. Smokers seem to be okay with breaking the law, or ignoring the health consequences, making India among the top five recipients of illicit smokes. Many illegal brands have gained immense popularity with names that are mundane to exotic flavors that are unique to ones that are bold esse being the smash hit for many a South Korean cigarette brand with all of its variants, Blue Gold, mental or lights. But there are more to this list.

Anil Rajput  

There are many legal brands in India that are available through the smuggled routes. esse mourn. Pine. Black camel, Marlboro Winston, I can go on.

Dia Rekhi  

It's Friday the 15th of July from the economic times. I'm your host theory key and you are listening to smuggling smokes, the booming black market on the morning brief.

Coming up, we discuss with Mr. Anil Rajput, a veteran from ITC, India's largest tobacco company, whom you just heard. And Mr. PC Jha, the former chairman of the Central Board of indirect taxes, that's excise and customs. why India is letting close to 16,000 crore rupees of revenues go up in smokes. We'll also talk about the rise in illegal cigarettes, the modus operandi of unscrupulous operators, and most importantly, why users prefer them over legit options like a wills a classic are a gold flake or even imported ones that come to India through proper channels like Benson and hedges or Marlboro.

Anil Rajput  

Actually, India is hotbed for smuggled cigarettes as per Euromonitor, India is the fourth largest illicit cigarette market in the world and it is growing and the reason for that could be very high tax arbitrage that is there. And the second reason is very excessive warnings on the cigarette pack. Because smuggled cigarettes packets are very attractive, and consumers end up preferring those packet versus the Indian packets, which have gory pictures on them.

Dia Rekhi  

Okay, so packaging could definitely be a factor. The pictorial warning that covers 85% of the packet is nothing short of traumatizing. Mr. Rajput agrees that the ghastly pictures of mouth cancer and ulcers meant as a disincentive for smokers sometimes does become counterproductive. Such warnings exist in most markets, but in varying degrees,

Anil Rajput  

it is an issue, there is no denying the fact globally, the average warning size is only 45%. And India has got 85% and many countries which are consuming countries like US, Japan, China, they don't have any warnings, some of them have only textual warning, whereas India has gone ahead and implemented these gory pictures in the country and the result of that is huge inflow of smuggled cigarettes in the country.

Dia Rekhi  

CBIC data also suggests that post 2016 When the 85% health warning had been mandated to quantum of smuggled cigarettes went up significantly. In the period 2011 to 2015, the value of seized illegal cigarettes was only around over 100 crore rupees compared to five years after that, where it touched over 6000 crore rupees. But for a regular smoker more than the pictorial warning the price difference makes a huge impact on their wallet. Ask yourself if a smuggled product is 50% cheaper than any comparable kingsize Indian brand, the lines between illegal and legal are bound to get hazy

Anil Rajput  

these products are available at different price points. In a very well known international brands, the price difference may not be very huge, but because retailers have huge margin there, then they will push those well known international brands, but less known brands like esse mourn black Wooden drum Paris, when these actually make their inroads into the Indian market because of the price differential. And the price differential is very substantial. Most of these brands are available between eight to 10 rupees a stick versus 18 rupees a stick of the legal taxpayed cigarette in the country, which is almost 50% or less.

Dia Rekhi  

Wow, that's a big difference. This makes so much more sense now. And since math has never been my strong point, I got Mr. Jha to tell us how much the profit margins smuggler stand to gain.

P C Jha  

The average rate of tax on the cigarettes is about 52%. And when the the cigarettes are smuggled or illicitly made in India, then this tax of 52% is not available. So this straightaway becomes the profit margin. Then, depending on what price the retailers will like to sell, it will of course, vary from place to place. But this margin of tax evasion is a statewide level you're with them and 52% is a huge margin.

Dia Rekhi  

Why is this important? I'll tell you. According to a report prepared for FICCI in 2019, the entire tobacco industry contributes a significant 2.7% of the total gross tax revenue to the government. Here are some statistics to help you in terms of tax contribution, while cigarette consumption by volume is only 11%. It contributes 87% of the tax revenue of the entire tobacco industry, the rest comes from chewing tobacco Bidi etc. This is because the taxes on the legal cigarettes is as high as 51 times per kg of consumption than other tobacco products. Mr. Jha Mr. Rajput, elaborate on the loss of revenue for the government.

P C Jha  

Our study indicates that the loss of loss of revenue annually to the government because of this item on this item cigarette is about 13,300 crores which is a big amount, there is also employment loss of about 3.7 lakh annually. This also is a very severe situation

Anil Rajput  

in just these five sectors, textile tobacco, readymade garments, capital goods and consumer durables. In 2019. We found that Indian economy lost one lakh 17,250 Odd crores This is huge just in five sectors and smuggling and counterfeiting takes place in multiple sectors. So, if somebody was to do a analysis for the entire country, that figure could be mind boggling, just in these five sectors, the loss of jobs is about 16.36 lakh you know, because smuggled goods are not manufactured in India, we are not only losing revenue, we are exporting jobs.

Dia Rekhi  

Now that we have the India context, I was curious to understand what the tax regime is like in other countries

Anil Rajput  

on a purchasing power parity basis. If you look at Indian taxes, as per who is on report, Indian taxes are 16 times higher than USA 11 times higher than Japan six times higher than China three times higher than Australia, Malaysia and UK. So, naturally the gravity will shift to our country of this illicit trade.

Dia Rekhi  

Speaking of taxes has GST been helpful to mitigate this menace,

P C Jha  

I find that under the GST also the tax rate is high like the firstly the GST rate for cigarettes is in the highest slab of 28%. Besides that, other components of the taxes are also there like the state compensatory cess. So the total incidence of tax has not changed. But one thing I would like to mention which has happened after the GST that the tax rates on cigarettes throughout the country it is at the same rate earlier. One huge difference was about the VAT rates. And I remember of a situation prior to July 2017, when the VAT rates varied too much among the different states so much that, on one hand Arunachal had the VAT rate of 12% and Rajastan had the VAT rate of 65%. So, there was a big problem of inter estate smuggling also. So GST has stopped to that, but so far as smuggling into the country is concerned, I don't think that position has much changed because of GST,

Dia Rekhi  

so the price remains a factor. But I spoke to some people who prefer the smuggle brands over the locally produced ones, to see if price is the only factor.

BG Sound  

So my go to brand currently is esse gold.

I smoke esse pulse.

I've been smoking as for quite some time. Now,

I prefer downhill lights, which is a cigarette that is extremely thin

radius, the diameter of the cigarette is about half of the regular cigarettes, which you find in India.

I like the thinness of the Cigarette it's also light, and I like the flavor,

the nicotine content is 0.4 milligrams. In most of the regular Indian cigarettes, it's more in the range of 0.7 to 0.8 milligrams. So it's like it's a question of smoking, less tobacco with each stick.

Smoking three esse cigarettes is like smoking one classic cigarette, I used to classic miles before and my teeth used to go black and I used to get this weird black color cuff every morning. So I made the switch. And since then I've not had any of these health issues, I feel like the quality is better. And plus, it's also cheaper.

The price factor doesn't really play such a big role.

I switched not because of any price crisis, but primarily because the secret was much, much smaller.

Dia Rekhi  

What's truly mind blowing is the way legitimate exports often get diverted into the black market. Sometimes even at high seas.

Anil Rajput  

There are no entry barriers for imported cigarettes to come through the legal channels. It is fairly open. In fact, this is under OGL. So anybody who wants to import legally, he can import without any approval from anybody, even though legal industry in India is under licensing, but import of cigarettes is without any license. So it can be very freely imported, but nobody would want to because if he's going to sell in India, he has to pay same taxes, he has to have same pictorial warning in India, when it is legally imported, now both the arbitrage that are available to the smugglers will go away.

Dia Rekhi  

 Here's a sneak peek into the smuggling playbook from the former tax man.

P C Jha  

Recent Caesars have indicated that they have been made mainly in two countries and they are Indonesia and Malaysia. And they are routed into India mainly through Dubai and Myanmar. You see a lot of cigarettes now come through in Myanmar into our this state of Manipur and then to Assam and then to other places in India. So, these are the two places then, so far as the different ways in which the smuggled cigarettes are entering into India. The analysis done by the DRI has indicated that about 65% of the small cygnets are coming through containers in the form of the concealments that they are misdeclared either as metal scraps or as toys or as waste paper to pillow covers, things like that. Then about 23% of the smuggled cigarettes are coming through land routes through the vehicles about 5% are coming through air cargo and about 7% have been seized after they have been smuggled into at various places in India. So that is mainly the pattern of the seizure so far as the seizures made by our enforcement agencies are concerned mainly the DRI and the customs, we find that there is a very steep rise after 2015 that the seizure of smuggled cigarettes for the five years from 2011 to 15 was only 142 crores, whereas the seizures during the five years from 2015 to 2021 was about 6600 crores. So these figures should indicate that the smuggling is on rage.

Dia Rekhi  

The incidence of seizures of smuggled cigarettes has more than doubled in recent years. But catching these illegal consignments is easier said than done.

Anil Rajput  

The menace has grown so much that many passenger when they're coming from international right into India, they are also carrying cigarettes as their personal baggage in addition to coming through the containers, because it is so attractive, you carry one full bag of cigarettes, a carton in your in your luggage, and you can make handsome money. So that's, that's a very big challenge for the custom authorities because most people go through the green channel. And it's impossible for custom authorities to get such passengers. Because when it gets distributed across the country, at the retail end, on each retailer, when you go and raid those places, the stock available with him will be only 10,000 or 20,000 rupees, they are not keeping huge amount of stock at the retail end. So for enforcement agencies to do a very aggressive action against the retailer is not really worth a while because the cost of any seizure action would be much more than what they will seize. So that's why you find that it's freely available, but at the same time at each retail outlet not more than 30 40 packets or 50 packets will be available.

So how do we curtail this. 

P C Jha  

So far as the smuggling of any item is concerned, it is much more better, if the country is able to seize it at the border. The focus of the customs department is also to make the entry points foolproof, but I will explain how difficult it is you see at the airport. At present the percentage of the passengers which are which baggage is actually checked will not be more than 0.5%. Because now the number of passengers is so huge that we cannot afford to check more number of the passengers then the time taken in the clearance would become high. And similarly at the ports, the number of the input to containers is also very high.

Dia Rekhi  

Smuggling is a crime and a crime always has serious punishments. But if these cigarettes are being smoked so casually and available so openly, it makes me wonder if maybe our law isn't as stringent

P C Jha  

so far as the laws for the to deal with your smuggling is concerned, I would say it is very severe. In fact, one of the most severe laws which are in place, like you see in the case of smuggling up to certain amount of value, the imprisonment can be for three years beyond that limit of value, which I think is about one lakh rupees, it is for seven years. And also the smuggling and foreign exchange catering are the only type of the offenses for which there is preventive detention, which is not there for other economic offences, perhaps the amount of the punitive action which is taken under the law. And the number of cases which are detected, perhaps still has not been able to create that level of deterrence, which can effectively check smuggling.

Dia Rekhi  

That's the law. But here's my question. We tax cigarettes at extremely high levels, almost inviting this sort of parallel economy to exist and to Dave, and then we're forced to clamp down on it. Is this a big mistake?

P C Jha  

Government has also to take into account this fact that if the tax rates are higher, then the profit margin isn't also becomes very high and to deal with that, the efficiency of the enforcement level has to match. So, if that efficiency is not very high and then the tax rate is high, then certainly the high rate will create a problem there will be more evasion there will be parallel economy. We have what information and reports that in a big way, unaccounted money is used to finance such anti anti national activities like insurgency and terrorism, that terrorism activities is usually financed out of the illegal money, which is generated all over the world through a smuggling. And one item which is very popular among the smugglers is certainly cigarettes at international level. Another of course, being items like narcotics, after all, there is logic because of which other countries have not kept their tax rates on events in products very high.

Dia Rekhi  

Our legal cigarettes industry has been bearing the brunt of the flourishing illicit market, with consumption of legal cigarettes seeing a massive 25% Drop in volume. All the while the illicit market, on the other hand, has been increasing constantly. Can we compete on prices can ITC use all of its financial marketing and sales muscle to stave off competition

Anil Rajput  

the impossible price we cannot compete because with with 55 60% of tax arbitrage that is there, we cannot compete with them anything which is non tax paid, we cannot compete with them.

Dia Rekhi  

So how do we solve this issue,

P C Jha  

the modernization of the customs which is an ongoing process that has to be made faster so that we are able to scan the containers and and then our vigilance at the land borders, particularly those areas which are vulnerable, the gravity of the situation has to be appreciated in the tax. Also, in my opinion in the government is sort of a change in the thinking is required. That government on the one hand feels that these products are harmful for the health of the people. But they do not appreciate that the illicit products are more harmful because they're the quality of tobacco is not known. And so if the conjunction has to be discouraged, the root is not the taxation for that the revenue department has not to be so active that the ministry which has to be active for the health of the people has to be healthy ministry making people educated about it is more important.

Dia Rekhi  

According to a report by the Directorate of revenue intelligence, seizure of illegal cigarettes increased during the pandemic by nearly 20%. The central board of indirect taxes and customs also said illegal cigarettes worth 1772 crore rupees were impounded in 2020 2021, which represented an increase of around 10 times the value of illegal smuggled cigarettes seized in the hole of the previous financial year. The economic activities related to tobacco and tobacco products are estimated to generate livelihood for over 4.57 crore people. But data shows 20% of output loss to domestic tobacco manufacturers takes place due to smuggling. According to the Tobacco Institute of India, the incidence of taxes on cigarettes has trebled in the last six years. All this as per FICCI report in 2019 on the same clearly high taxes are a big villain in this and that is aiding the smuggle trade. We have seen bootleggers flourish and imported alcohol as well as especially in prohibition states seem reason policymakers need to take a closer look at the problem. For starters, why restrict FDI we should open up let brands flourish and the best brand win no monopoly is efficient and cigarette is a prime case. Let adults make informed choices. Let the health warnings be there too. It's important for a country where literacy rates are still low. But once free trade in a benign tax regime flourishes, smuggling is bound to go down automatically. Exchequer gains with the customers gain to thank you Mr. Rajput and Mr. PC Jha deeply appreciate your insights. 

You were listening to smuggling smokes the booming black market on the morning brief with me Dia Rekhi. Producers for this episode Surbhi Modi from the economic times and Soundarya Jayachandran and from Aawaz. Sound Editor Swati Joshi from Aawaz, Indranil Bhattacharjee, and Rajas Naik from economic times. Executive producer Anupria Bahadur and Arijit Barman. If you liked this episode, please make sure to share it on your social media. The morning brief airs every Tuesday, Thursday and Friday. do tune in to et play our latest platform for all audio content, including the morning brief. That's all from me for today. Thank you and have a good weekend.

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