High Tax on cigarette to affect the livelihood of lakhs in Meghalaya
In the budget presented on 18 March’15, the government has proposed to increase VAT on Cigarette and other tobacco products by 35%. This would increase in VAT rate on cigarettes to 27% effective from date of notification.
Legal Cigarettes industry makes a sizeable contribution towards the livelihood of more than 30,000 traders both in rural and urban areas of Meghalaya. In a manner of speaking, cigarette business plays a vital role in ensuring subsistence for a huge population of over 2.2 lacs which includes families and dependants of these traders. In absence of Coal mining, when the entire state has struggled to deal with employment issues over last few months, such an action would seriously hamper the economy of the tribal belts of the state.
Central Govt. has already increased Excise on cigarettes by 25% in Union Budget on 28 Feb.’15
It is relevant here to point out that in the recent Union Budget the Govt. of India has increased Central Excise Duty on cigarettes by up to 25% thus further widening the price gap between the legal cigarettes and the illegal ones. On top of this the increase in VAT rate on cigarettes by Govt. has made the legal cigarettes even more expensive.
High Tax on cigarettes would force cigarette prices to go up, which will in turn increase the price differential in legal cigarettes compared to the illegally manufactured cigarettes in the State and smuggled cigarettes originating neighbouring states and Bangladesh. This would encourage smuggling/illicit trading of cigarettes in the State. This situation would culminate in complete domination of smugglers and anti-social elements in State’s Cigarette trade and honest traders would be being harassed, exploited and in turn forced to pull out from the business.
Will Govt achieve anything?
It is relevant here to note that the States of UP,Bihar,Tripura, Madhya Pradesh and Rajasthan, who had also increased VAT on cigarettes were faced with the problem of falling revenue due to increase in illegal cigarettes in the States. All these States have since reduced VAT rate on cigarettes and experienced significant increase in revenue from cigarette because of end of illegal cigarette trade in the States.
Closer to home Tripura increased VAT on tobacco products to 35% in Nov 2013, which led to huge influx of illegal cigarettes from neighbouring states and Bangladesh leading to fall of tax revenues by 15%. The Tripura government on realising futility of the decision on both the revenue or tobacco consumption, rolled back the hike which has led to reduction in the illegal stock inflow and increase in tax revenue by 120% in last couple of months. For Assam as well, the state government has increased VAT on Tobacco products to 30% from Nov 2014 resulting into similar influx of illegal cigarettes from neighbouring states and a subsequent fall in tax revenues by 15%.
Currently these illegal cigarettes are freely available at Rs.10/- for a pack whereas similar legitimate cigarette packs are available at a bare minimum of around Rs.50/-. It is known to all that only legitimate cigarettes bear the brunt of any tax increase whereas illegal cigarette don’t get impacted at all. The proposed cess on cigarettes in the state will result in making the legitimate cigarette even more expensive without impacting illegal cigarettes. Because of high price differential between the legitimate cigarettes and those of illegal cigarettes the consumption of cigarettes has already shifted from legal tax paying cigarettes to the tax evaded illegal/smuggled cigarettes. And in the process the Govt.’s objective of controlling cigarette consumption by increasing taxes has fallen by the way side.
Tobacco Traders’ Plea to State Govt
The plight of over 30,000 traders of state is at stake. In light of the above facts, the State Govt. would do well to rethink on the issue in the context of likely increased cigarette smuggling from neighbouring countries. The region has suffered enough from violence and the Govt. should not be guilty of giving an impetus to anti-social elements through unintended consequence of high VAT rate and proposed cess on cigarettes. In brief, the real beneficiary from the proposed cess on cigarettes would be the smugglers and terrorist groups from neighbouring states and countries and illicit traders of cigarettes.
The biggest losers in this game, has been the honest and marginal Cigarette Traders of Meghalaya, their families and the state Govt itself.