New Delhi: Expressing concern over the possibility of foreign direct investment (FDI) in the country’s tobacco sector, the Tobacco Institute of India (TII) has said such a move would increase contraband trade here, in addition to resulting in a loss of nearly Rs2,000 crore per annum in taxes and forex outflow.
“Given the high taxes on cigarettes in India, smuggling provides an attractive tax arbitrage opportunity. Reports suggest that, currently, contraband-cigarette sales cause a loss of Rs1,500 crore to Rs2,000 crore per annum to the Indian government in terms of taxes and forex outflow,” TII said.
It said, with declining volumes in their home markets, multinational tobacco companies have been making efforts to penetrate developing markets such as India.
As documented by the World Health Organization, the modus operandi seems to be to set up operations in target markets, through direct investments or imports, creating a legitimate umbrella for distribution and demand creation activities, it said, adding the increased demand is then met through contraband trade.
Citing Taiwan as an example, the institute said smuggled cigarettes as a percentage of the legal market peaked at 22% in 1990 after that country liberalised cigarette imports in 1987. Between 1988 and 1995, cigarette smuggling cost Taiwan an estimated $1.68 billion (Rs7,056 crore) in revenues.
The institute also pointed out that India’s removal of quantitative restrictions on cigarette imports, which has led to the entry of foreign brands, coupled with FDI, might very well serve as “an excellent cover to mask the thriving contraband market”.
Commenting on the issue, ITC Ltd vice-president Nazeeb Arif said that as much as half the cigarette manufacturing capacity, regulated by compulsory licences under the Industries Development and Regulation (IDR) Act of 1951, is unused and that allowing FDI in the sector would further increase this underutilization of capacity.
“Allowing FDI in cigarette manufacturing will not only aggravate capacity underutilization, but will also seriously undermine the government’s efforts at tobacco control. International experience also reveals that FDI in the tobacco sector leads to large-scale organized smuggling, which will adversely affect the offtake from Indian farmers and deprive the exchequer significantly,” Arif said.
He said China does not allow FDI in tobacco for similar reasons, despite the fact that it is open to foreign investment in almost every other sector. Since both imported and smuggled cigarettes do not use indigenous varieties of tobacco, their influx has a negative impact on farmers.