Change in buying patterns

Taxation on Cigarettes

The Union Budget of 2015 attempted to make smoking and consumption

of tobacco expensive. The Finance Minister announced a steep rise in
excise duty in his proposal. Excise duty was upped by 25 percent on
cigarettes that are 65mm long (small-size) while the duty on cigarettes of
all other lengths (regular and king-size) was increased by 25 percent.

Cigarettes have risen at the same rate over the last four years; thus the
cumulative raise being 75 percent. Earlier the excise duty was increased
by 22 percent in the interim budget of July 2014. The reason cited for this
increase is promotion of public health.

According to a Bloomberg report, cigarette companies have admitted that

the existing taxes have hit demand contributing to the decline in sales of
legal cigarettes but the government did not fathom the implications of this
action. It led to the emergence of the short cigarettes.

India’s taxation system follows a six-tier tax system (which is now a

seven-tier system) where in length of cigarettes and use of filters is taken
into account. Thus cigarette companies, in the event of such taxation
laws, tend to twist them to their advantage in a bid to maintain sales
volumes. And that is what, cigarette giant ITC did. The company
shortened cigarettes of its brand ‘Bristol’ by 4mm. Thus, a pack of Bristol
bears the same cost as earlier; this was confirmed by a vendor who
seemingly appreciated the experiment.

Many vendors have also acknowledged that consumers have switched

over to illegal and smuggled cigarettes, bidis and chewing tobacco.

Illegal cigarettes are cheap as they do not comply with Indian taxation
system whereas the legal ones although with their low cost of production
are still expensive owing to taxes. Thus vendors who prefer to stock
branded cigarettes only lose out to competitors on the street who sell
these illegal cigarettes. The study also learnt about the influx of low-cost
Chinese and Indonesian cigarettes, again, cheaper than Indian sticks.
 Central excise rates on cigarettes (in Rs. per 1,000 cigarettes)

%
%
Rate Rate in increase Rate in
Type of increase
Rate in pre- 2014- over 2015-
cigarette by over
1996-97 2014 15 pre- 16
filter/length 2014-
budget budget 2014 budget
15 rates
rates

Filter, 430 669 1150 71.9 1280 11.3

Filter,65-70mm 430 1409 1650 17.1 1740 5.5

Filter, 70-75mm 800 2027 2250 11 2335 3.8

Filter, 75-85mm 1070 2725 3290 20.7 3375 2.6

No filter, 75 669 1150 71.9 1280 11.3

No filter, 65- 315 (60- 2027 2250 11 2335 3.8

70mm 70mm)

Other 1350 3290 3290 20.7 3375 2.6

(>85mm)
Income

Although the overall demand for cigarettes is on the decline the demand
for low-cost cigarettes however, is on the rise. Given the short length
cigarettes are being sold at the same price as when they were 4mm
longer, consumers prefer the budget cigarette. Another reason that has
been cited as the reason for increase in demand for short length
cigarettes are smokers of bidi moving up in the value chain. ()

Substitute Goods

Bidis

Bidis are currently under-taxed in comparison to cigarettes. These are just

as much injurious to health which can serve as a strong ground to
increase the excise duty on bidis.

Bidis that are handmade are taxed at quite a lower rate than those
manufactured using machines. There’s also a special exemption from
excise duty for manufacturers who produce less than two million pieces of
bidis every year. Also the industry being fragmented it’s difficult for excise
officials to keep a tab on manufacturing facilities.

India has over 300 bidi brands in the market with none enjoying a share
that exceeds 5 percent. Bidis are either sold in packs of 25 or 20. A pack
of branded ones are priced anywhere between Rs.2.5 to Rs.5 for every
pack of 25.

The table below shows excise imposed per 1000 sticks of bidis both
handmade and machine-made
Table above gives a clear picture of the difference between excise duty
levied on cigarettes and bidis. Bidis clearly emerge as the cheaper option
and so an obvious substitute.

Illegal Cigarettes

These include smuggled cigarettes introduced into the country by evading

taxes. A cheap legal cigarette costs about Rs.3.40 however, an illegal
cigarette with filter costs about a rupee. Per Euromonitor International,
India’s the fifth biggest illegal cigarettes market.

Influence due to advertising

Advertising for cigarette brands, through any form of mass media

whatsoever, is prohibited. Although advertising at the point of sale is
permitted provided certain guidelines are adhered to. The picture below
shows advertising at point of sale-