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According to a recent report by FICCI’s Committee Against Smuggling and Counterfeiting Activities Destroying the Economy, the loss to the industry on account of illicit trade stood at Rs 105,381 crore in 2014, having grown 44 per cent over 2012 figures of Rs 72,900 crore. In terms of revenue loss to the government, the figures stood at Rs 39,239 crore and Rs 26,190 crore in FY2013-14 and FY2011-12, respectively.
The report lists auto components, alcoholic beverages, mobile phones, tobacco, FMCG products and computer hardware as the top seven fastest growing categories as far as illicit trade are concerned. Losses on account of illicit trade in alcoholic beverages and mobile phones have been the highest among these, having risen 151 per cent and 111 per cent, respectively.
Overall, loss of sales has increased across industries in the manufacturing sector due to Illicit trade. The report attributes this increase to high tax rates, which, it says, create greater demand for cheap and counterfeit substitutes. For instance, taxes on tobacco and tobacco products are not just high but also dual in nature with both central and state governments levying separate taxes.
“The maximum revenue loss to the exchequer is from tobacco products, that is about 23 per cent of the total (Rs 9,139 crore),” says P.C. Jha, advisor, FICCI. VAT rates imposed by state governments, which can be vary from 12 per cent to as high as 65 per cent on tobacco products, is another reason why the government is losing out on revenue, says Jha.
What is the way out? The report calls for streamlining of tax structures, introduction and/or enforcement of standard quality parameters for various products and enforcement of existing laws to curb illicit trade.
Time-bound introduction of the Goods and Services Tax (GST) is expected to help root out illicit trade in at least five out of the seven product categories as all inter-state trades will be taxed at a single rate under the proposed GST Bill. But here is the worry. While the central government has kept tobacco products out of the purview of GST, state governments have kept alcoholic beverages out of the ambit of GST, thus making it difficult to curb illicit trade in tobacco and alcoholic beverages.
In such a scenario, raising public awareness about counterfeit tobacco products and alcoholic beverages may be the only way out. As trade in counterfeits encourages generation of black money, a significant portion of which is utilised to finance insurgency and terrorism, raising awareness may prove to be the ultimate antidote. Is the finance minister listening?
(This story was published in BW | Businessworld Issue Dated 01-06-2015)