Technology and innovative methods are not only being used to usher in transformative changes for society’s good, but also being used by smugglers, who have developed slick methods to smuggle illicit items.In recent years, India has seen a significant rise in the availability and use of narcotics. Due to its strategic location, India has long been a hub for narcotics trafficking, and its extensive borders have made it challenging for enforcement agencies to apprehend those involved in illegal trade of psychotropic substances.
The Smuggling in India 2023-24 report by the Directorate of Revenue Intelligence (DRI) revealed that some of the latest techniques include concealing illegal items inside children’s storybooks, wigs, shampoo bottles, and even lehengas.While the DRI has been doing a commendable job, the detrimental effects of the related phenomenon of an ever-burgeoning black market cannot be overstated. This illicit trade is undermining legitimate businesses, distorting competition, and significantly eating into tax revenues, running counter to the vision of ‘Viksit Bharat 2047’, not just funnelling money to organised crime, but also financing terror via money laundering.
The impact of this black market is far more profound in the case of industries which have historically been exposed to higher tax regime like tobacco. The World Customs Organisation (WCO) and PM Narendra Modi have both voiced concerns about the links between organised crime, the black economy, and terrorism.If we consider the proposed GST slab of 35% on some class of items, including traditionally high-tax products such as tobacco, aerated drinks, etc and the proposal to tax variably readymade textile goods, the menace of black marketing is expected to rise further.
Manufacturers and retailers of readymade goods have reportedly called the move “retrograde”.At least for tobacco and textile sectors, we have figures available for the size of the illicit market and they are mind-boggling. Between 2018-19 and 2022-23, the illicit tobacco market grew by 17.7%, from ₹25,495 crore to ₹30,012 crore. Textiles and Apparels witnessed a rise of 29.67% growth in illicit trade between 2017-18 and 2022-23. In terms of current prices, the illicit market grew from ₹3,11,494 crore in 2017-18 to ₹4,03,915 crore in 2022-23.
Historically too, the government’s aggressive or ‘punitive’ taxation policies on cigarettes, aimed at reducing consumption, have fostered the growth of the illegal market. Smuggled Illicit cigarettes now represent 26.1% of Indian cigarette market – as much as 1/3rd of the legal cigarettes.Moreover, continued high taxation has not even curbed consumption.
Between 2011 and 2023, illicit cigarette volumes surged by 70%, while legal cigarette consumption dropped by 9%. Over this period, legal cigarette consumption has decreased by 28%, while illicit consumption grew by 70%, contributing to an overall increase of 49% in tobacco consumption across the country.
This changing pattern must be considered against tax incidence: during 2012-13 to 2016-17, excise rates increased by CAGR 15.7%. During Union Budget 2017 and with imposition of GST in 2017, cigarette taxes increased by 20%. In Union Budget 2020, taxes increased by 13%. In Union Budget 2023, NCCD rates were raised by around 16%.Moreover, the bulk of tobacco consumed in the country is largely produced in the unorganized sector (68% of overall tobacco consumption) – pays little tax either due to tax exemptions or evasion and are difficult to regulate.
Also, this shift to an ever-increasing black market for cigarettes is having a significant impact on India’s economy, particularly for agricultural sector. (The tobacco industry directly supports 4.57 crore livelihoods, with nearly 70% employment in tobacco being related to agriculture.) India lost 238 million man-days of employment in tobacco-growing regions owing to illicit cigarettes between 2013 and 2023.Globally, there are examples of countries that have successfully curbed illicit tobacco trade by adjusting tax rates. In Canada, for instance, reducing cigarette taxes in the early 1990s helped stem the tide of cigarette smuggling.
The implementation of a new 35% GST slab could set a precedent for other sectors to demand reclassification.
If certain luxury or indulgent goods are moved to this new slab, sectors like cosmetics, or even fashion might face increased calls for taxation based on perceived indulgence or luxury status. A shift towards a more complex GST structure may lead to a snowball effect, where products with similar characteristics or harmful attributes might also demand reclassification.
On the flip side, larger businesses, which have more resources and the capacity to invest in advanced tax technology or dedicated compliance teams, are better positioned to handle these complexities.
India’s GST collections have experienced remarkable growth in recent years. Between 2017-18 and 2023-24, monthly GST revenues doubled, reaching ₹1.68 lakh crore, with an all-time high of ₹2.10 lakh crore in April 2024.
This growth followed the government’s decision in 2017 to reduce the number of items under the 28% GST slab from 224 to just 50. With GST collections already at record levels, there is no pressing need to introduce a new tax slab.
Rajesh Mehta is an International Affairs expert working on areas like Market Entry, Innovation & Public Policy