SOARING VAT rates on Cigarettes in Punjab; A bane for traders, boon for smugglers and illegal manufacturers

Background

Cigarettes make a sizeable contribution towards the total business of more than 1 lakh traders both in rural and urban areas of Punjab and hence constitute a major portion of their livelihood. Cigarette business plays a vital role in earning survival for a considerable population of 5-10 Lakhs that includes families and dependants of these traders.

Most of the traders come from weaker section of the society and are in this business for years. It is a low investment business and therefore it is easier for people from the lower section to get initiated in this business. In absence of any significant educational, economic and social background, these people have very little scope for alternative employment.

As per Global Adult Survey conducted by WHO and Ministry of Health & Family Welfare, Punjab has 12% Adults as tobacco users. However, cigarette users are only 3% which is one of the lowest in the country and is also significantly lower than all India cigarette users at 5.7% of Adults.

Despite such low consumption of cigarettes, the State Govt has increased VAT rate only on Cigarettes, whereas, VATrate on other tobacco products remain at 14% only. What it means is that low consumption product is taxed heavily and high consumptions are taxed lightly, therefore, It is difficult to understand how VAT increase on Cigarette will help in Tobacco Control in Punjab. This will, in fact, only encourage people to shift from Cigarette to other cheaper tobacco products and illegal / tax evaded   cigarettes which are freely available at price which is one third of legal cigarettes.

While increasing vat rate on cigarettes, the State Government should keep in mind the prevailing rates in the neighbouring States, which are lower than the rate announced by the Punjab Government.

Over one lakh self employed will be deprived of employment and livelihood:

Over one Lac small shop keepers who are engaged in cigarette trade in the State and a total of 5 lac people (including their families) are impacted by the State Government’s decision. A majority of these traders belong to the economically weaker section of the society and for them the cigarette trade is the only source of livelihood. On one side, Punjab Govt. has announced unemployment allowance for the people looking for employment and on the other, by increasing the VAT rate on Cigarettes in Punjab ,  State Government is likely to deprive people of employment and livelihood who are engaged in an honest trade. These poor helpless people look upto the State Government to safeguard their economic survival.

Encouragement to cigarette smuggling from surrounding states

The Tax disparity owing to steep hike in tax rates on cigarettes (55%) in Punjab shall lead to a very sharp price hike in cigarettes in Punjab compared to neighbouring states. This will result into an illegal trade of cigarettes from the surrounding Sates and encourage smuggling.

This will attract smugglers and anti-social elements in the cigarette trade and  will force honest  traders, like us, who earn our livelihood through hard work, out of business.

In such a scenario, what will happen to us and our dependants? It will be a complete social disaster. 5 lakh people will come on the road and their fate doomed to complete uncertainty.

Abetment to the Spread of illegal/tax evaded cigarettes:

Punjab is the key hub for illegally produced cigarettes. The illegal / tax evaded cigarettes neither pay Excise nor VAT or any other taxes and , therefore, are available freely and at a very cheap rate in all parts of Punjab. Some of the biggest manufactures and traders are thriving on this flourishing trade in Punjab. We can’t ignore the fact that these illegally manufactured cigarettes are of inferior quality due to absence of any quality control mechanism and are extremely popular among youth due to its availability at extremely low price. Currently these illegal cigarettes are freely available at Rs.10/- for a pack whereas a similar legitimate cigarette pack is available at a bare minimum of around Rs 30/- for a pack. It is known to all that only legitimate cigarettes bear the brunt of any VAT increase ,whereas, illegal cigarette don’t get impacted at all. The increase in VAT to 55% in the state will result  in making the legitimate cigarette even more expensive without impacting illegal/ tax evaded cigarettes. Illegal/Tax-Evaded cigarettes  will continue to sell at the current rate (Rs.10/- per pack) which has led to the significant growth of  these cigarettes  in Punjab.

The growth and dominance of the illegal/tax-evaded cigarette in the market is all set to pose a huge threat to Government’s Public Health Policy as the quality and manufacturing process of these illegitimate cigarettes is always a big question mark.

Revenue loss to Punjab Govt:

The State Govt has increased VAT rates on cigarettes from 22.55% to a 55% . In view of the overall background of the trade, this steep hike of 144% in tax rates is phenomenal by any measure. The Government’s dual objective of addressing to health issues arising out of tobacco consumption as well as the need to fill Govt Exchequer will not meet its cause as is obvious from the fact that this huge differential Tax rate is only going to abet smuggling of cigarettes from surrounding states and consolidate the position of Illegal/Tax evading cigarette manufacturers

Similar decision by the Uttar Pradesh Government has backfired and the whole Cigarette business in the State is gone in the hands of smugglers and anti-social  elements. The UP Govt. has lost revenue despite three fold increase in tax and the honest cigarette traders of the State are on the road.

Tobacco Traders’ Plea to State Govt:

In light of the above facts, we request the State Govt to rethink on the issue in the context of benefits that will be drawn by neighbouring states and its traders from this huge Tax increase in Punjab and leaving the traders of Punjab to their own mercy.

In brief, the real beneficiary from the current Vat scenario will be  the Governments of the neighbouring states , their cigarette trading community, manufacturers of illegal / tax evaded cigarettes   and those involved in smuggling and illicit trade of cigarettes.

The biggest losers in this game are the Cig Traders of Punjab, their families and the Punjab Govt itself.