The Great Indian Smoke Trick

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Photo: AFP
Photo: AFP

Every year, the Union Budget is a universal nail-biter. Members of the working class think of how much they have to shell out in taxes, companies work out how to avoid them using creative accounting techniques, the income tax department sits and thinks of new ways to ensure that you pay what you owe, and keyboard warriors go viral on social media decrying excess taxation, State spending, sops, no sops and so on.

Everybody’s woes are recorded except one group, who are consumers of a $4 billion industry — smokers, who shell out for the taxes and the production cost of cigarettes and a substantial amount in illegal profiteering, which generates thousands of crores of rupees in tax-evaded money.

This group of hapless citizens takes the heat from every side. First is the risk of contracting cancer and other diseases, then there are eye-popping warning labels on the pack, there is no product advertising, and now the government wants to shut down the in-sales, cigarette box advertising too. On top of all that, smokers also often have to shell out above the maximum retail price (MRP) for their indulgence.

Come Budget season, the smokers know that they have to shell out more for cigarettes, and now governments have decided that revenue collection through increased taxes on cigarette sales might be a double-edged sword. “Let smokers pay for subsidies or let them stop smoking,” is the prevailing philosophy.

It might be working. Ask smokers around you and many are planning to quit or at least cut down. It is not just because of the tax hike, but the black marketing that comes with the tax hike. This black marketing is not just ripping off smokers, but also results in the government losing thousands of crores of rupees every year in illegal profits.

There are two scenarios of black marketing — on the printed MRP and on the purchase of loose cigarettes.

A month before every Union Budget, speculation is rife about how much the price of cigarettes will go up by. Take this as point A and point B is when the actual, post-Budget, increased MRP begins to appear on the cigarette pack. The time between points A and B is when a large section of wholesalers make a killing by hoarding stocks and selling at increased prices once the new price has been declared by the company.

A good case in point is Gold Flake (the king-sized 84 mm variety and not the 69 mm sibling), the most popular brand of the Indian Tobacco Company (ITC).

The MRP for Gold Flake cigarettes stood at Rs 85 for a pack of 10 cigarettes and Rs 170 for a pack of 20 from January 2014 until Finance Minister Arun Jaitley’s maiden Budget. In 2006-07, the prices were Rs 33 and Rs 66, respectively.

Sometime last month, a rumour began doing the rounds that Gold Flake’s MRP would shoot up to Rs 120 and Rs 240, respectively. Within a day, the speculated figure was Rs 250 for a pack of 20 cigarettes. Immediately thereafter, the cigarette stocks started diminishing by the day. The grapevine of this circuit seems incredible and should be envied by every business reporter in the country.

“Aagey se nahin mil raha hai (The supply is low),” parroted retailers and wholesalers, pointing at empty shelves.

On 8 July, most shops said they got only five packets even from ITC’s authorised distributors.

The ‘missing’ packets will be sold at the post-Budget price even if the pack bears the old MRP. The government will definitely not benefit from these black-marketed packs of cigarettes because the excise invoices have already been submitted for the old MRP.

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On the eve of the 2014-15 Budget, some shopkeepers were already buying 10-cigarette packs of Gold Flake for Rs 98. And customers were paying, albeit grudgingly, Rs 110 a packet. Loose Gold Flake cigarettes were selling at Rs 12 a stick.

Last September, the price of a 10-cigarette Gold Flake pack was raised to Rs 75 from Rs 68. In January, it was increased to Rs 85. The stocks bearing the MRP of Rs 75 could have lasted a few weeks or a month. On 9 July, Gold Flake was being sold at Rs 100 for a pack of 10 cigarettes, but these were January stocks, bearing an MRP of Rs 75. So, someone has actually been hoarding this stock for more than six months while waiting for a post-Budget price hike.

There is a chain of wholesalers who pick up the cigarettes from the company’s distribution network and even from the factory. In some cases, it appears that these wholesalers are adding a rupee or two to every packet they sell.

Retailers, who buy cartons of cigarettes from authorised distributors, pay the regulated price (see table). These retailers make about Rs 15 for a pack of 20 cigarettes and Rs 7.5 for a pack of 10 and about Rs 4-4.5 per 10-cigarette pack of smaller cigarettes such as Wills Navy Cut or the smaller 69 mm Gold Flake.

Retailers who sell loose cigarettes hawk Gold Flake Kings for Rs 10 a stick, raking in an illegal profit of Rs 30 per Gold Flake pack of 20 cigarettes. Most retailers TEHELKA spoke with revealed that of every 10 packs sold, loose cigarettes are sold from at least three. The untaxed profit on this 30 percent over-priced sale works out to about Rs 90 per carton.

The companies want to contain this untaxed, illegal profit from the sale of loose cigarettes. ITC wants every retailer to put up posters declaring the price per loose cigarette, but nobody will let such posters stay or affect its selling price.

Everyone in this chain passes the buck to the man ahead and no one will take the blame for the hoarding and black marketing. Some retailers indicated that authorised and unauthorised wholesalers are responsible for the hoarding, and retailers for the inflated price of loose cigarettes.

India consumes about 68 million kg of tobacco a year in the form of cigarettes. As per commerce ministry figures, in 2010-11, 116 billion cigarettes were sold to more than 120 million people. Assuming that a fourth was sold with illegal profiteering at an average Rs 1 per stick, that’s around Rs 2,900 crore worth of profits from which the exchequer got zilch.

This is nearly half the tax already evaded on the market of smuggled and contraband cigarettes, estimated to be around Rs 6,000 crore, which hits the cigarette industry in the gut.

This figure is just on loose cigarette sales. Imagine the amount of profiteering on cigarettes hoarded for a month since the rumour of a price hike started, or the January stocks being sold now. ITC recorded net sales of nearly Rs 30,000 crore in 2012-13; imagine how much the black market is worth.

On the eve of the Union Budget, 10-cigarette packs of Gold Flake with an MRP of Rs 85 are already costing the retailer Rs 98 and he is selling it for Rs 110-120. There are some who are selling it for Rs 90. This will continue on hoarded stock bearing the old MRP, while it will be sold on the new MRP as long as stocks last.

The excise duty on cigarettes will shoot up considering the new philosophy of the government of taxing tobacco sales. The UPA government kept the tax below 40 percent of the retail price despite the World Bank’s recommended rate of 65-80 percent. The increase could lead to a spike of about Rs 18,000 crore in additional revenue. But, that would not justify turning a blind eye to profiteering and black-marketing to the tune of thousands of crores a year, which the auditor and excise duty collector should look into immediately. Until such time, the cigarette black marketeers will continue to blow smoke rings over smokers.

ushinor@tehelka.com

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