Tax increases push sales of cigarettes in India further down

Tax increases lower sales of cigarettes in India

Data released recently and covering the second semester of 2014 reveals that the volume of cigarettes sales in India for the last six months of 2014 plunged by more than 10% when compared to the corresponding data for the first semester of the previous year. This fall in sales, which is the biggest that has been recorded in recent years, is directly attributed to the increase in the retail prices of cigarettes by a 15%-35%, as a result of the government decision to raise the taxes on cigarettes by the same amount though the state budget. According to the director of the most important local industry lobby, the Tobacco Institute of India, the noticeable drop in the sales of legal cigarettes is definitely a by-product of the sharply higher taxes imposed by the government.

Pointing to the fact that all the India situated cigarette making factories have witnessed a double-digit decline in their output ever since the budget increasing the taxes on cigarettes was passed, the Tobacco Institute of India also highlights that the increase in taxes on cigarettes is triggering a shift in tobacco consumption towards cheaper brands and tobacco forms. Moreover, the most alarming fact is the push towards illegal cigarettes, which presently already constitute more than 88% of the total tobacco consumption in the country.

The major players in the tobacco manufacturing industry of India are trying to survive the blow they have taken through the decrease in cigarette sales volumes, and protect their earnings by employing price increase management methods as well as by trying to focus on premium cigarette brands. An illustrative example is the big tobacco company ITC, which according to analysts is expected to see its volumes declining 7-8% year-on-year. However, tax and cigarette price hikes are not the only cause of this, as the industry is also challenged by a regulatory uncertainty and persistent rumours that harsher anti-smoking legislation will be passed soon.

Indeed, buying a pack of legal cigarettes for a cheap price in India appears to be becoming increasingly elusive, since in this country cigarette prices have gone up, due to taxation, by an average of 12%-15% consecutively during the past three years alone. Up until last year the impact on the volume of cigarettes was less profound, at around 2% to 4% annually, but consumers and the market seem to have reached the end of their tether and this is why the fall in volumes in 2014 was so big.

The cascading increase in cigarette taxation was further burdened by increases on the VAT imposed on cigarettes by several Indian states, as well as by the fact that the central government has also raised the excise duty on cigarettes by almost 75% cumulatively during the past three consecutive years. Moreover, the fastest growing segment of the industry, which accounts for 20% of its total volume, that of cigarettes of less than 65mm length, was also hardly hit by a rise of 72% of the taxes on it, with the relevant prices climbing by 25%-35%, also having a strong detrimental impact on sales volumes.