Blasé Capital BLACK IS WHITE
It may seem incongruous, and it may seem inconsistent with the public stances of the ruling regimes. Indeed, it may not even be on the radar of the policy-makers. However, either deliberately or by default, the governments sometimes encourage the black economy, and help in the generation of black money. A few days ago, the Government decided to impose additional excise duties on cigarettes that ranged between INR 2,000 and INR 8,500 per 1,000 sticks. Experts felt that the prices of various brands, depending on the length of the stick, would go up by 20-30 per cent. The new duties were applicable from February 1, 2026. However, beginning January 8, especially in New Delhi, retailers and paan shops increased the cigarette prices. When questioned, they responded that the hikes were imposed by the wholesalers, who refused to sell at the printed and original prices.
The implications are evident. One can assume that the wholesalers, and distributors are more likely to accept the difference in the printed prices, and actual higher sale prices in cash. The retailers may nudge the buyers to pay in cash, rather than through digital payment modes to hide the extra earnings. This will enhance the black economy, even if the Government’s intent was not to do so. By announcing the move in advance, it encouraged the distribution chain to effect price hikes immediately, and rake in the extra incomes, and profits. Of course, there will be tax evasion as neither entity in the distribution chain will either pay income tax, corporate tax, or GST on the difference in the white and black prices, which will be 20-30 per cent. There is loss of revenues, which for the argument’s sake the Government was not entitled to till February 1, and there is more black money in the system.
Obviously, the Government has a solid defence. It is invariably better to announce the additional duty structures, and changes in advance to prepare the manufacturers. The makers need to change the packaging, and pricing on the packets, which takes time. No producer can change the prices within a day or a week. In addition, no firm can stop the manufacturing for a few days, or weeks, to effect the changes. Hence, a preparation period is critical. This is why the changes in the Union Budget are announced ahead of the applicable date, which is usually April 1, although the Budget date is February 1. Yet one can contend that the changeover period needs to be reduced. This is valid because even the Budget-related changes are adopted by the market before they come into effect. Even during the intervening period, there is an impetus to the black economy.
Another interesting aspect is that the governments are aware of the nexus between the wholesalers and firms, especially in the cigarette business. Decades ago, the regimes fought bitter and prolonged court cases against the cigarette firms for tax evasion, and avoidance. The core of the matter then was that the wholesalers and retailers charged higher amounts in collusion with the makers, and the differences were shared between the firms, wholesalers, and retailers. Thus, although there is no evidence, it may emerge that there is collusion today between the various entities involved in the distribution process. The money that each layer makes will depend on its influence, clout, and hold over the chain and channels. But the scenario encourages the various players across the chain to participate, and share the black money generated, even if it is for a few weeks. Given that January is a winter month, and cigarette sales generally go up during the cold season, the amounts are massive.
The solutions are not easy. The governments may be unable to explain the system of announcing tax and duty changes in advance. The wholesalers, and retailers, if not the firms, will be encouraged to make extra bucks given such opportunities. The buyers, people like us, have no powers to rebel or oppose, as the retailers blame the wholesalers, and do not fear loss of sales because cigarettes are an addiction, and smokers cannot stay away from it for long periods. Since sales are ensured, the retailers and wholesalers are emboldened. The same logic applies to essentials, and products that households need to buy. However, there can be a few safeguards. First, when it comes to specific items, the officials can impose a strict monitoring mechanism for a short period to reduce the black market. At popular outlets, and those where sales are high, they can post officials to prevent distribution at higher prices.
If the word gets around within the distribution chain that officials are monitoring the system, and will act against wholesalers who overcharge, or retailers who demand higher prices from the buyers, the practice will reduce, although it will not be eliminated. Such procedures may be enough in the metros, and large cities, where the sales are higher as a proportion. Similarly, the Government can take out advertisements that advise the buyers not to pay more, and warn retailers not to charge more. During GST 2.0, the Government took out front-page advertisements in dailies that promptly showed how the prices of products will come down. If the policy-makers can do this to make people aware, they can do the same in a reverse situation, when there is a possibility of overcharging.
