Faith Foundation released report of study about economic loss due to illicit trade and tax evasion by tobacco companies

Faith Foundation in collaboration with Dept of Social Work & Dept of Economics, SP University released a report of the study done by a collaborative group of researchers from across India to estimate the economic loss to the country due to illicit trade and tax evasion by tobacco companies.

The report was released on the Central Excise day – 24th February by REACT (Research Action For Tobacco Control), an network of independent researchers works towards highlighting topics on tobacco control that needs urgent attention of the general public and policy makers.

This report titled Excise and Tax Violation by Tobacco Companies and Smuggling of Tobacco Products is an attempt to understand the severe loss to the economy due to illicit trade and tax evasion.

This report was prepared through a collaborative effort of grassroots institutions engaged in public health and tobacco control.

For a period of six months, researchers across India reviewed publicly available government reports to measure the extent of illicit trade known from India.

The researchers used four publicly available government sources: The Comptroller and Auditor General of India (CAG)2; Directorate of Revenue Intelligence (DRI)3; Central Board of Indirect Taxes and Customs (CBIC)4; Parliament reports5 published online from 2005 to 2020.(Annexure III).

Major findings of the report

1. On 8th February 2021, the Indian finance minister responded to a question in the Indian parliament about companies evading excise and customs duty, exceeding Rs. 100 crores. The Minister said there are a total 189 cases of evasion of excise and customs duty, of which 25 cases (14%) involved tobacco companies7. Two major cigarette companies are a part of this list (Godfrey Phillips India Ltd and ITC Ltd) while most (21) other companies are of smokeless tobacco.

2. Most of the tobacco companies which were evading excise and customs duty are from Uttar- Pradesh, Maharashtra, and Delhi (4 companies each).

3. A follow-up question asked for the names of companies against which there are pending cases at the Central Excise Gold Control Appellate Tribunal, High Courts or Supreme Court. The government responded that there 71 cases, of which 7 cases involved companies manufacturing/selling smokeless tobacco.

4. 90 CAG reports have documented violations for specific tobacco products (cigarette, bidi, gutkha, zarda, tendu leaves, paan masala, kattha, and areca nut, supari), along with the quantum of violations. These violations spanned 17 states.

5. The CAG reports have discovered tax fraud by tobacco companies to be Rs. 390.38 crore between 2009-2018.

6. Maharashtra reported the maximum quantum violations (Rs 219.03 crore, from 2013, 2017-18) followed by Bihar (Rs 94.63 crore, 2011-2015, 2017). Bihar has reported the highest number of violations (30.77% of non or short levy of tax evasion cases and 11.54% of irregular allowance or claim of tax concession cases), followed by Uttar Pradesh (tax violations with 11.53% of non or short levy of tax evasion cases.

7. Among different tobacco products, the highest quantum of violation is on paan masala (Rs.230.12 crore) followed by mixed (smokeless) tobacco products (Rs. 87.19 Crore), zarda (Rs.41.68 crore), cigarettes (Rs. 22.62 crore), bidi (Rs. 4.22 crore), and followed by gutkha (Rs.3.76 crore) respectively (Figure 2) (Annexure I, Table 3). In addition, CAG reports also show illicit trade in raw materials like tendu leaves used for making paan masala and the banned gutkha.

8. The DRI has found tobacco related violations from 15 states from 2018 to 2020. DRI recovered illicit tobacco goods worth Rs 130 crore (Annexure-II, Table-I), and several goods for which the value was not determined.

9. Only one state, Gujarat, reported seizure of paan masala worth Rs 38 lakhs in 2018.

10. Customs department officials in Delhi seized 4.5 lakh cigarettes of foreign origin in July 2020. The cigarettes branded ‘Paris’ and valued at Rs 40 lakhs were being smuggled from Bangladesh and Myanmar and were being clandestinely brought to Delhi from Howrah via Varanasi in a COVID-19 special train.

11. According to media reports, customs officials made another seizure of illegal cigarettes in July 2020, again on a COVID19 special train in Delhi. This time, they seized 10 lakh cigarette sticks worth over Rs. 1.5 crore in 100 cartons.

12. The brand names were ‘Special Gold Esse’ and ‘Super slim Esse Light’. Officials also found 9 lakh cigarette sticks of another brand, valued at Rs 36 lakhs in the same train. The cartons were seized from a goods compartment of a COVID-19 special train which arrived from Varanasi to Delhi.

The recommendations to deal with the issue of tax evasion and illicit trade were given to be as follows :

Recommendation 1:

Tobacco sector must be treated at par with other sin goods, like alcohol, guns and the like. Monitoring the supply chain will bring collateral benefits for governance, and improve overall tax administration, compliance, and enforcement, which will translate into reduced illicit trade and higher revenue.

Recommendation 2:

The Government of India must develop a robust data and information system to monitor the tobacco sector, from cultivation to consumption, which will enable better fiscal management and regulation.

Recommendation 3:

The trade and tax regulatory framework needs to develop a strategy to maximize revenues from tobacco products and the industry. For example, India’s Goods and Service Tax (GST) council must adopt an inflation-linked dynamic tax rate that is corrected annually, remove distinctions like segments and slabs between products, phase out subsidies and concessions to tobacco trade, and peg all inputs that make tobacco products at ‘sin tax’ rate.

Recommendation 4:

Government of India needs to build mechanisms to curb internal and external illicit trade by aligning with global good practices, recommendations and guidelines which it has committed to under the WHO’s Framework Convention for Tobacco Control’s (FCTC) Illicit Trade Protocol.

Recommendation 5:

Government of India should promote measures like compulsory registration for the manufacture, trade and retail sale of tobacco products and take control of the supply chain. This will improve the collection of revenues and deter leakage through illicit trade.