From South Africa to Azerbaijan, global cigarette smuggling trends a warning for India

NEW DELHI: As India prepares for a sharp increase in cigarette taxes from February 1, policymakers are being cautioned against the risk of a surge in illicit tobacco trade, with global experience showing that excessive tax shocks on legal markets often fuel the rapid expansion of illegal networks that can overwhelm legitimate businesses, weaken enforcement and even corrupt institutions. International developments underline these risks, with BAT South Africa recently announcing the closure of its cigarette manufacturing plant due to sustained pressure from rampant illicit trade, as illegal cigarettes—untaxed, unregulated and sold at a fraction of legal prices—steadily eroded the lawful market. In another example, Azerbaijan detained a former customs chief in connection with a large-scale tobacco smuggling operation, revealing how deeply illicit cigarette trade can penetrate enforcement agencies and how once such syndicates scale up, they establish durable supply chains that are extremely difficult to dismantle.

These precedents are particularly relevant for India, which already ranks among the world’s largest illicit cigarette markets, with past steep tax hikes widening the price gap between duty-paid cigarettes and untaxed illegal alternatives, creating strong incentives for smuggling and counterfeiting. At its peak, illicit cigarettes accounted for 26.1 per cent of India’s total market, making the country the fourth-largest illegal cigarette market globally, while annual government revenue losses are estimated to exceed Rs 23,000 crore. The South African shutdown illustrates the impact on employment, investment and manufacturing capacity, while the Azerbaijan case highlights enforcement challenges once illegal networks gain scale, especially when high taxes amplify profit incentives. While public health goals are vital, abrupt and excessive tax increases risk shrinking the legal market and strengthening illegal supply chains, making a balanced and predictable tax regime, supported by strong enforcement, more effective in protecting revenues, livelihoods and the integrity of the legal market.