FM urged to bring cigarette taxation to pre-GST level

New Delhi, June 27 (IANS) The Federation of All India Farmer Associations (FAIFA) has urged Finance Minister Nirmala Sitharaman to correct an error in cigarette taxation under the new tax regime, which did not account for the cascading effect on excise duty that existed in the pre-GST system.

FAIFA is a non-profit organisation that represents the cause of farmers and farm workers of commercial crops across the states of Andhra Pradesh, Telangana, Karnataka and Gujarat.

In a letter written to the Finance Minister, which has also been submitted to various concerned Ministries including the PMO, Ministry of Health and Family Welfare, Ministry of Agriculture, Ministry of Commerce and Industry, Ministry of Labour, the association has highlighted that error in cigarette taxation has inadvertently increased compensation cess rates that has resulted in additional taxes of around 13 per cent above the pre-GST levels.

"Any additional burden caused by the increase in compensation cess rates will put further pressure on the livelihood of Indian tobacco farmers. As observed in the past that increase in taxes have resulted in the inflow of huge quantities of illicit cigarettes in the market," the FAIFA letter to Sitharaman said.

The legitimate cigarette industry size in India, which was at 110 billion sticks in 2011-12 as per industry estimates, has dropped by 25 per cent to about 83 billion cigarettes in 2016-17. In contrast, the illegal, duty-evaded cigarette segment has grown to about 26 billion cigarettes in 2017, i.e., almost one-fourth of the industry.

To ensure livelihood support for tobacco farmers, FAIFA has appealed to roll back tax increase so that taxes on the sector comes back to pre-GST revenue neutral rates. The federation has also said that government should have a tax policy that disincentives illicit trade of cigarettes. It has also urged for reinstatement of tobacco export incentives to boost the economy of Indian Flue Cured Virginia (FCV) farmers.

"... we would like to underline that the principle of revenue neutrality has been reiterated time and again by the government in respect of fixation of tax rates in the GST era," Javare Gowda, President, Federation of All India Farmer Associations (FAIFA), said making a case for restoring taxation to pre-GST levels.

The entire legal cigarette value chain is presently reeling under penalising taxation on account of continuous increases in excise duties and compensation cess on cigarettes, which have cumulatively gone up by 202 per cent between 2011/12 and 2017/18 leading to shrinkage of cigarette volumes by more than 25 per cent since 2012/13, FAIFA has said.

Murali Babu, General Secretary, Federation of All India Farmer Associations (FAIFA), said: "We have tried out various alternative crops and burnt our fingers. The chilli crop as an alternate to tobacco has miserably failed during last season. In fact, since 2013-14, the earnings of FCV tobacco farmers have shrunk cumulatively by more than Rs 4,000 crore due to drop in production (refer graph) of tobacco for the manufacture of domestic legal cigarettes. For the first time, 22 FCV farmers committed suicide and many are under huge debt in the states of Andhra Pradesh and Karnataka."

According to FAIFA, a steep increase in excise duty in the recent past has led to growth of smuggling of cigarettes in India due to the high tax arbitrage.

There has been a 32 per cent increase in illegal cigarette trade, increasing from 19.5 billion sticks in 2011 to 25.7 billion sticks in 2017, making India the 4th largest illegal cigarette market in the world (as per Euromonitor International) and further supported by an independent study done by FICCI.

It has resulted in revenue losses of approximately Rs 13,000 crore and is growing annually.