Cigarette industry impacted by discriminatory regulations: ITC

The legal cigarette industry in India continues to be impacted by a punitive taxation and discriminatory regulatory regime. The operating environment for the legal cigarette industry in India was rendered even more challenging during the year, with two rounds of sharp increase in Excise Duty - in July 2014 and February 2015. This includes a cumulative increase of 115% on filter cigarettes of 'length not exceeding 65 mm', which has widened the price differential between legal and illegal cigarettes and made it extremely difficult for the legal cigarette industry to counter the unabated growth of illegal cigarettes in the country.

Over the last 3 years, the incidence of Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by 98% and 104% respectively. It is pertinent to note that Kerala, Tamil Nadu and Assam, which together account for a significant portion of the Company's sales volumes, sharply  increased VAT rate on cigarettes during the year.

The combined impact of the sharp increase in Excise Duty and VAT as stated above, is exerting unprecedented pressure on legal industry sales volumes. Besides adversely impacting the performance of the legal cigarette industry, this has led to sub-optimisation of the revenue potential from the tobacco sector.

High incidence of taxation and a discriminatory regulatory regime on cigarettes in India have over the years, led to a significant shift in tobacco consumption to lightly taxed or tax evaded tobacco products like bidi, khaini, chewing tobacco, gutkha and illegal cigarettes which presently constitute over 88% of total tobacco consumption in the country. Thus, the share of legal cigarettes in overall tobacco consumption has progressively declined from 21% in 1981-82 to below 12% in 2014-15 even as overall tobacco consumption has increased in India.

As per a recent independent study, it is estimated that products representing 68% of overall tobacco consumption in the country escape taxation as they are manufactured in the unorganised sector with little statutory oversight. While India accounts for around 17% of world population and constitutes over 84% of global consumption of smokeless tobacco, it has a miniscule share of only 1.8% of global cigarette consumption. As a result, revenue collections from the tobacco sector are sub-optimised even as the overall tobacco control and health objectives remain substantially unfulfilled. The requirement therefore is an India-centric tax and policy framework for tobacco that cognises for the unique tobacco consumption pattern in the country.

The imposition of discriminatory and punitive VAT rates by some States provides an attractive tax arbitrage opportunity for illegal cigarette trade by criminal elements. The consequential decline in legal cigarette volumes in such States have led to stagnation/decline in revenue collections, even as illegal cigarettes gained significant traction. On the other hand, the pragmatic decisions of several State Governments to rationalise VAT on cigarettes have facilitated improvement in revenue buoyancy and arresting the growth of illegal trade.

According to an independent study conducted by Euromonitor International - a renowned global research organisation - India is now the 5th largest market for illegal cigarettes in the world. In fact, illegal trade comprising smuggled foreign and domestically manufactured tax-evaded cigarettes is estimated to constitute one-fifth of the overall cigarette industry in India resulting in a huge revenue loss of over Rs.7000 crores per annum to the national exchequer.

Notwithstanding the challenging regulatory and taxation environment, the Company strengthened its product portfolio across segments to reinforce its leadership position in the industry. During the year, specific emphasis was laid on developing and launching products with differentiated tobacco blends, special filters and flavour bouquets. Several innovative variants like Classic Blue Leaf with Jet Flo filter, Gold Flake Gold with Quad Core filter, Classic Ice Burst with Capsule filter and Classic Fine Taste with Triple Solid filter were launched during the year in line with the Company's philosophy to offer world-class products to the Indian consumer.