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BUSINESS: CIGARETTE SMUGGLING
Why Companies Smuggle?
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"With
developed markets shrinking, MNCs are targeting developing nations."
Tej Walia, Dy India Representative,
WHO
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In response to a
detailed and specific questionnaire from India Today, BAT's London office
issued a general denial claiming that the BAT Group companies do not smuggle.
"We do not condone smuggling and we do not encourage or collude with
others to smuggle on our behalf," it said. The company claimed that
smuggling damages BAT's business and that its profits would rise if smuggling
was eliminated.
But there are many reasons why a company could
encourage-and even indulge in-smuggling of cigarettes. The chief reason
is the fall in cigarette consumption in most developed countries, which
has created excess capacities for tobacco MNCs. Instead of creating fresh
production capacities in the developing countries, where demand for cigarette
is still growing rapidly, it makes perfect business sense for the company
to export from its plants in developed countries to markets in developing
countries. Observes Tej Walia, deputy India representative at the who,
which has been battling cigarette smuggling: "Because of the shrinking
markets in the developed countries, MNCs are pushing their sales into
developing countries."
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"Smuggled
cigarettes from neighbouring countries have flooded the remotest
corners of India."
A.C.
Sarkar, Director, Tobacco Institute of India
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Higher margins is another draw for smuggling
because they allow greater price flexibility. By keeping prices of smuggled
cigarettes low, companies can expand markets. The World Bank and who estimate
that globally about 355 billion sticks are smuggled a year, giving the
cigarette the dubious distinction of the most illegally traded consumer
product.
The surge in smuggling has burnt holes in the
pockets of Indian companies as well as that of the Government. The fall
in cigarette sales of domestic companies in the past two years is partially
due to the rise in smuggling. The Government has lost about Rs 500 crore
a year in excise and customs duty. If the falling sales meant declining
tobacco consumption, it may have been good news for the health lobby.
But the dip in sales is probably compensated for by the surge in demand
for smuggled cigarettes. That's worse because controlling the content
and consumption of illegal cigarettes is tougher.
Smuggled cigarettes sold in the market violate
many Indian laws. They do not conform to the Cigarette (Regulation of
Production, Supply & Distribution) Act that prescribes that every
pack carry an Indian statutory health warning. Smuggled cigarettes also
violate the Weight and Measurement Act that specifies printing of maximum
retail price in rupees.
After months of inaction, the Government conducted
nationwide raids on May 29 and seized smuggled cigarettes worth crore
of rupees. A month earlier a truckload of smuggled cigarettes was confiscated
near Bangalore. "Smuggled cigarettes have reached all over the country
but we are keeping an eye on it," assures M.K. Zutshi, director-general,
Directorate of Revenue Intelligence. An official of the Indian High Commission
in London investigated the probability of organised smuggling into India,
but the findings aren't conclusive.
The industry of course thinks that the best
way to cut smuggling is to keep taxes low. But how does the Government
discouraging smoking? The who is working on a global convention that will
harmonise the tax rates on cigarettes across the world. Says Walia: "If
India's neighbours have the same tax rates, smuggling will reduce significantly."
That's one more reason for India to smoke the
peace pipe with its neighbours.
-With Syed Zubair Ahmed in London
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