India is studying the Kenyan model of tracking tobacco products to curb illicit trade that leads to loss of tax revenue, according to people involved in deliberations.
The mechanism includes tax stamps with a QR code that can be scanned through a smartphone to check the authenticity and trace goods throughout the supply chain, the people said requesting anonymity. To begin with, the government may focus only on cigarettes, they said.
Legal cigarettes account for only 11 percent of the tobacco consumed in India, according to data available with the Tobacco Institute of India, a representative body of farmers, manufacturers and exporters of cigarettes. Illegal cigarettes—comprising smuggled and locally made cigarettes on which tax is not paid—account for around a fourth of the cigarette industry, it said. That results in an estimated Rs 13,000-crore revenue loss for the government each year at current tax rates.
In Kenya, tax stamps improved the ability to trace products, reduced counterfeiting and increased tax revenue, Ernst and Young LLP Kenya said in an emailed response to BloombergQuint. Tax revenue rose 28 percent in four years to 2017 since the African nation started cracking down on illegal trade, it said. Using the same technology, the country saw tax revenue from liquor surge 69 percent during the period.
Here’s how the model works:
- The Excisable Goods Management System includes electronic digital stamps that have photosensitive readers and ensure taxes are paid.
- The stamps are monitored against revenue collected in real time.
- A product’s authenticity is verified using a mobile app which identifies a QR code integrated in the stamp.
If adopted, the move will be in line with Article 15 of the World Health Organisation’s Framework Convention on Tobacco Control that calls for elimination of illicit trade and effective enforcement of national laws. Once the convention comes to force, countries will have five years to amend laws and implement the mechanism to track and trace tobacco products, the people quoted above said.
BloombergQuint’s emailed query to the Finance Ministry remained unanswered.
Tracking of tobacco products will mean manufacturers will have to bear the costs of the technology, the officials quoted earlier said.
In Kenya, the tax stamps cost 2.8 Kenyan shillings (Rs 1.9) each for cigarettes, cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes, according to Ernst and Young Kenya. They are applied on all primary cigarette packaging based on the stock keeping units. A manufacturer also incurs the cost of reconfiguring the production line to integrate it with Kenya Revenue Authority’s system. It ranges between $10,000 (Rs 6.75 lakh) and $500,000 (Rs 3.38 crore).
The increase in sales volumes for cigarette manufacturing companies will outweigh the costs they will have to bear initially, said Sachin Bobabe, a senior analyst at brokerage firm Dolat Capital. If implemented, higher costs will come even as taxes on tobacco products have steadily risen over the past few years.
Duties or taxes on cigarettes have jumped about sixfold since 2014, Bobade said. As a result, volumes of India’s largest cigarette maker ITC Ltd. declined 16-18 percent during the period, he said.
Goods and services tax system sent the effective levy even higher. The effective tax rate rose 13 percent over the pre-GST rates after the compensation cess was increased last year. Since 2011-12, according to a Tobacco Institute of India report, the cumulative growth in tax rates has been 202 percent.
ITC and its smaller peer Godfrey Phillips Ltd. declined to comment on BloombergQuint’s queries.
Will It Be Enough?
About 89 percent of tobacco in India is consumed as chewing tobacco, zarda, bidi and illegal cigarettes, according to the Tobacco Institute of India. That’s unlike the rest of the world where tobacco consumption is synonymous with cigarettes which account for 90 percent of total the consumption.
So tracking cigarettes alone won’t be enough to increase the revenue, one of the officials quoted above said. The government will have to come up with more ways to tackle tax evasion on other tobacco products, he said.