Indian government’s budget dilemma – curb the sale of cigarettes or let the over $12 billion tobacco industry provide the much needed cash

Indian government’s budget dilemma – curb the sale of cigarettes or let the over $12 billion tobacco industry provide the much needed cash
BCCL
  • The Indian government has proposed several changes to the Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003.
  • The changes are proposed to promote healthy living as almost 267 million Indians today consume tobacco in one form or the other.
  • However, the changes are set to hit India’s tobacco industry and pose a dilemma for some of its biggest tobacco companies like ITC and Godfrey Phillips.
  • The upcoming budget and stricter GST could only make it worse for the industry.
The over $12 billion Indian tobacco industry has a new problem at its doorstep, as the government is set to enforce strict regulations around the consumption of tobacco, mainly cigarettes. While the need for regulations around tobacco is to be lauded as it impacts the health of millions, in a year where the government has to ensure its cash flow remains strong, it remains to be seen whether Finance Minister Nirmala Sitharaman will hurt the likes of India’s big tobacco companies, ITC. For ITC, cigarette sales alone account for 46% of its total revenue – a whopping $6 billion in FY20.

The Indian government has proposed several changes to the Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003.

Here are the proposed changes:

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  • Tobacco products will not be sold to persons under the age of 21.
  • Sale of tobacco products will be prohibited within 100 yards to 100 metres of an educational institution.
  • Retail sale of loose cigarettes will not be allowed.
  • Retailers will have to obtain a mandatory license, which will be subject to annual renewal.
  • All shops selling tobacco products will have to set up advertising and promotional content to show the harmful effects of tobacco.
The changes are set to come into force from February 1, 2021.

The changes are proposed to promote healthy living as almost 267 million Indians today consume tobacco in one form or the other. According to a report by Global Tobacco Index, the economic cost of diseases caused by tobacco accounts for over $22.4 billion in India.

However, the proposed implementation of these products has already seen a dissent from India’s retailers and tobacco industry. According to a Reuters report, India’s tobacco companies will vehemently oppose the new rules, some of whom have already begun to see the impact in the stock market.

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One of India’s biggest tobacco companies that generates nearly ₹2 billion in cash every year, ITC, has been an underperformer in the stock market till about two months ago when it saw a recovery in its share price.

Indian government’s budget dilemma – curb the sale of cigarettes or let the over $12 billion tobacco industry provide the much needed cash
BI India/Flourish

The Federation of Retailers Association of India had also appealed to the Prime Minister to roll back the changes proposed under COTPA. The association said that the changes were aimed at destroying small retailers without really impacting India’s big retailers.

“By making age old trade practices like selling loose cigarettes a cognizable offence and an imprisonment of 7 years for small violations makes small traders look like heinous criminals. Compared to a 2-year imprisonment for extortion or for dangerous driving that can cause death, this is the extreme of the extremes. This puts paan, bidi and cigarette sellers in the same crime list category as a person voluntarily throwing acid on someone or causing death by negligence etc. How can anybody be so insensitive while drafting the amendment towards poor, marginalized people who are struggling to earn their daily living?,” said Ram Asre Mishra, President, Federation of Retailers Association of India.
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The association also said that the change of area near an educational institution where tobacco can be sold from 100 yards to 100 metres will hurt small time retailers who will have to pack their bags and move. “As per law, we do not sell tobacco products to minors. In congested and heavily populated cities, such a restriction is impractical. Petty retailers will have to vacate their place without any means to support their livelihoods. Moreover, if a new educational institution will come up within 100 metres of the retailer’s location and he will again be asked to move,” said Gulab Chand Khoda, Joint Secretary of FRAI.

Here’s why the government could be pushing to stop the retail sale of loose cigarettes. According to ITC’s annual report from 2020, it is estimated that on account of illegal cigarettes alone, revenue loss to the Government is almost ₹15,000 crore per annum. “About 68% of the total tobacco consumed in the country remains outside the tax net,” said the report.

Here’s a look at the taxes paid by ITC, which doesn’t even include the 28% GST on cigarettes which is a huge revenue factor for the government.
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ITC20192020
Current Tax₹4441.97 crore₹5849.24 crore
Deferred Tax₹(411.21) crore₹130.60 crore

The tobacco industry has a long history of liaisoning with the government to influence policies



A recent report by the Global Tobacco Index said that the tobacco industry, directly or indirectly, often reaches out to the government for changes in favour of the industry. The report cited instances from the ban of electronic cigarettes and taxation of tobacco, where industry leaders pushed for changes in government policies.

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Talking about the taxation policies, the report cited that Godfrey Phillips in its annual report had spoken about the stringent taxation of cigarettes. “It said “High level of taxation” has “led to the rise in illicit cigarette trade”, and conveniently linked that to “consequent loss of revenue to the government.”. It said “various industry bodies and corporates have urged the government to consider bringing the taxation on cigarettes to pre-GST levels.” This very rhetoric of decreasing tax rates so as to tackle illicit trade has been exercised by various tobacco companies: Golden Tobacco Limited, Godfrey Phillips, and ITC,” said the report.

Here’s how India fared in the Tobacco Industry Interference Index. The score determines the interference by the industry in government policies – higher the score, higher the interference.

YearIndia’s score
202061
201969
201772
Source: Global Tobacco Index

The upcoming Budget could change the game


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The Budget has always mentioned changes for the tobacco industry. In the Budget 2020, Finance Minister Nirmala Sitharaman hiked the excise duty paid for cigarettes. The National Calamity Contingent Duty (NCCD) on cigarettes was increased by 212% to 388% depending on the length of the cigarette sticks.

And the upcoming Budget 2021 could once again change the game. Analysts believe that the government may ask the tobacco industry to pay up more. “Possibility of GST hike in the Budget or during any GST council meets remains high due to weak government finances amid the COVID-19 situation,” said analysts at Motilal Oswal Securities.

SEE ALSO:
Budget 2021: From Income Tax deductions to creating jobs and boosting healthcare – Here’s all that could be in Nirmala Sitharaman’s fiscal plans

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