1
Invisible enemy!
Socio-Economic Impact of Counterfeiting,
Smuggling and Tax Evasion
in Seven Key Indian Industry Sectors
2
About this report:
This report has been prepared by Thought Arbitrage Research Institute (TARI) for FICCI Committee Agai...
3
This study would have been not possible without the willingness of individuals and organisations to share their experien...
CONTENTS
Foreword
Editor’s Note
Executive Summary
1. Introduction 16
2. Rationale to Evolve an Approach for India
3. 23
Ta...
Computer Hardware
Industry Facts
Objectives
Overview
Research Methodology
Estimating loss to industry
Validation
61
Indust...
6
Social Impact
11.
12. Annexures
Annexure I: Key Milestones
133
Consumers are today at grave risk due to the menace of counterfeiting.
Consumers of fake products face perilous risk to li...
Editor‘
s Note
and tax evasion in India entitled “Socio-Economic Impact of Counterfeiting, Smuggling and Tax
Evasion in Se...
counterfeiting, smuggling and tax evaded goods.
Existence and operation of illicit markets is an enduring problem that esc...
11
used across all the industry sectors. Therefore the study used the following approach:
Micro, Small and Medium Enterpri...
12
The estimate of tax loss to the central and state exchequers for each of the seven selected sectors is summarised in th...
13
to expect any measures to eliminate counterfeiting forever, but the
aim should be to make it unattractive for fraudster...
Total Annual Sales
Sectors studied
Auto Components
Alcohol
Fast Moving Consumer Goods (Personal Goods)
Mobiles Phones
Comp...
Study Highlights
Auto Components
Alcohol
Computer Hardware
FMCG (Personal Goods)
FMCG (Packaged Food)
Mobile Phones
Tobacc...
16
produced or imported from outside and sold in a country by evading taxes. It also includes sale of domestically produce...
of the “sui generis” right of the maker of a database.6
However, in practice, the term is allowed to encompass any making ...
and money laundering. The probability of being caught and punished by law enforcing authorities depends, to some extent, o...
purchaser.
However tax competition has increased among states to attract investment where by each state provide different ...
2. Rationale to Evolve
an Approach for India
commissioned by global industry associations working on anti-counterfeiting e...
21
value (of genuine
goods) or intrinsic price basis (consumer price if aware of fake status) or cost basis (total cost of...
22
validation supplement
not as the core approach.
-
ous range of types of products that are counterfeited ranging from lu...
23
In today’s sophisticated global economy with easy and widespread access to technological advances, there are virtually ...
product. Though many are aware that the loss of income reduces the incentives for creativity, the impact seems too remote ...
is residual uncertainty surrounding the accuracy of measurements, even the most conservative estimates suggest the hidden
...
26
is increased.
in the marginal tax rate occurs when the net income of a taxpayer does not vary as a consequence of the c...
Operations
Government EconomyOriginal Right
Holder
Indirect)
Anti-Counterfeiting
Customs Seizures,
Campaign
(Monetary Comp...
Impact on Original Right Holder/Manufacturer
The most accessible metric for original manufacturer is loss of revenues, and...
Thus rights holders or genuine product manufacturers face reduction in sales volume, downward pressure on prices, erosion
...
attracts organised criminal groups and terrorist organizations due to low risk of prosecution (on account of non-traceabil...
31
Counterfeit auto parts are not subjected to the rigorous safety testing borne by their licit counterparts. Counterfeit ...
32
tax evaded goods. This review included global studies commissioned by public institutions and agencies of repute, indus...
33
In the previous sections we have outlined the impact of counterfeiting and smuggling on various stake holders such as o...
6. Approach to the Study
FICCI CASCADE members and industry representatives. The categories covered in each of the industr...
Micro, Small and Medium Enterprises (MSME).
The study experienced data quality and availability issues which were resolved...
36
Consumption/ Demand Side Estimation
(NSS) is one of the largest sample survey of its kind and collects data on househol...
The “remaining difference” arising between the difference in consumption expenditure and value of supply (sum of productio...
of revenue loss was not covered in this study.
sectors.
generated by the legitimate manufacturers if the demand-supply gap...
Auto Components
Alcohol
Fast Moving Consumer Goods (Personal Goods)
Mobiles Phones
Computer Hardware
Fast Moving Goods (Pa...
The grey market in the automobile sector exist mainly in the after-sales market.
packaging closely imitates original produ...
On the consumer side, the market for counterfeits is worldwide because of penetration and growing homogeneity of motor veh...
The value of consumption in automobiles after market sector encompasses the cost of maintenance of both personal and
comme...
expenditure on components and spares on personal and commercial vehicles in the country.
aftermarket and are prone to coun...
used in after markets as per ASI data. The value of total domestically produced sample components considered is estimated ...
The value of total supply of sample auto components for aftermarket domestically produced by factories, micro and small en...
Estimating loss to industry
131
annual growth estimates of ACMA132
Hence applying the formula.
This study estimates a grey...
Data Validation
The grey market percentage for 2007-2008 was found to be 27.2% which is close to the estimates of 29.6% fo...
and operations of the grey market. Two such reports, ACMA and OECD , have highlighted the following matters:
ACMA
assemble...
Alcohol products are counterfeited because of superior recoverable brand value, price premium, high tax and excise
seller ...
The substitution of alcohol can be carried out as small scale cottage industries but there is increasing evidence of large...
account for the ambivalent or undocumented liquor consumption. Hence total consumption expenditure on sample alcohol codes...
After ascertaining the value of domestically produced goods the study determines the value of goods imported for the alcoh...
Estimating loss to industry
of grey market. Applying the formula.
The loss to industry on account of grey market operation...
Delhi government to increase the excise collection and check the supply of the illicit alcohol in the state.
The problem o...
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india
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Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india

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Consumers are at a grave risks due to counterfeiting in products. Consumers of fake products face perilous risk to life and property and they need to know the extent of the problem. This report aims to empower the consumer with the knowledge and pervasive nature of counterfeiting and smuggled goods.

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  1. 1. 1 Invisible enemy! Socio-Economic Impact of Counterfeiting, Smuggling and Tax Evasion in Seven Key Indian Industry Sectors
  2. 2. 2 About this report: This report has been prepared by Thought Arbitrage Research Institute (TARI) for FICCI Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE). Disclaimer Thought Arbitrage Research Institute has exercised due care and diligence in preparing the report. However, the information contained is of statistical nature and has been compiled or arrived at from sources believed to be reliable, but no representation or warranty is made to their accuracy, completeness or correctness and hence Thought Arbitrage Research Institute cannot be held responsible for omissions or errors. This document is for information purposes and to initiate a debate or dialogue concerning matters contained in it. The information contained in this document is published for the assistance of the recipient but is not be to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This document is not intended to be a substitute for professional, technical or legal advice. No individual or any other entity, including governments or governmental representatives, should initiate actions solely on the basis of the contents of this report. TARI and FICCI disclaim all responsibility and liability (including, without or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Readers are encouraged to inform the project partners about any inaccuracies or to provide additional information for future editions Thought Arbitrage Research Institute Companies Act. TARI is a privately-funded, independent and non-partisan Indian think-tank on - TARI is founded by Kaushik Dutta and Kshama V Kaushik. Research Team-Thought Arbitrage Research Institute Research Conceptualisation & Industry Interface: Kaushik Dutta Principal Researchers: Research Reporting: Kshama V Kaushik Research Support: E-mail: contactus@tari.co.in gayathri.venkatraman@tari.co.in Address: Thought Arbitrage Research Institute C-16, Qutab Institutional Area, www.tari.co.in
  3. 3. 3 This study would have been not possible without the willingness of individuals and organisations to share their experiences with Sno. Name of the Organisation 1 Automotive Components Manufacturers Association 1. 2. 3. Mr. Chander S Jeena, Secretary Hologram Manufacturers Association of India 6. Ms. Meenu Chandra (Joint Director), Ms. Kashifa Hasan (Research Associate), Ms. Jagriti Ahuja (Research Associate), FICCI CASCADE 11. 12. 13. Dr. T.C.A Anant, Chief Statistician of India 16. experts and representatives who provided us their valuable advice but did not wish to be named; small business units, retail outlets which were surveyed and all the advisors who meticulously reviewed the draft report and gave their valuable comments. Acknowledgements
  4. 4. CONTENTS Foreword Editor’s Note Executive Summary 1. Introduction 16 2. Rationale to Evolve an Approach for India 3. 23 Tax Rates and Tax Evasion Impact on Original Right Holder/Manufacturer Impact on Economy Impact on Consumers 32 6. Need for Study 33 Approach to the Study Supply Side Estimation Consumption/ Demand Side Estimation 36 Industry Analysis Auto Components Industry Facts Objectives Overview Research Methodology Validation Alcohol Industry Facts Objectives Overview Research Methodology Validation
  5. 5. Computer Hardware Industry Facts Objectives Overview Research Methodology Estimating loss to industry Validation 61 Industry Facts 61 Objectives 61 Overview 61 Research Methodology 62 Estimating loss to industry Validation 66 Industry Facts Objectives Overview Research Methodology Estimating loss to industry Validation Industry Facts Objectives Overview Research Methodology Estimating loss to industry Validation Tobacco Industry Facts Objectives Overview Research Methodology Estimating loss to industry Validation
  6. 6. 6 Social Impact 11. 12. Annexures Annexure I: Key Milestones 133
  7. 7. Consumers are today at grave risk due to the menace of counterfeiting. Consumers of fake products face perilous risk to life and property. Consumers need to know the extent of the problem. This report is an important step towards empowering the consumers with knowledge of the pervasive nature of this problem. FICCI has been at the forefront of advocating policy framework on various aspects affecting the industry. Scattered anecdotal accounts on the extent of the problem of counterfeiting and smuggling can be found in media reports and government documents. However a systematic treatment of the subject was missing. FICCI’s initiative in the form of the ‚ Committee Against Smuggling and Counterfeiting Activities Destroying the Economy‘ (CASCADE) has not only initiated research to assess the extent of the menace but has also gone one step further to outline its impact on our key industry sectors in India. This report demonstrates that India is serious about adequately protecting its knowledge based economy. Indian industry urges the government to make this a priority. I would like to congratulate all the committee members and stakeholders who have contributed towards this project particularly Thought Arbitrage Research Institute (TARI) and it is hoped that this study would lead to further sector I wish FICCI-CASCADE success in its future initiatives. Dr. A. Didar Singh FICCI Foreword
  8. 8. Editor‘ s Note and tax evasion in India entitled “Socio-Economic Impact of Counterfeiting, Smuggling and Tax Evasion in Seven Key Indian Industry Sectors.” This report is a groundbreaking compilation of the extent of the problem in India that offers the building blocks for key policy makers and decision makers. The report has been prepared by Thought Arbitrage Research Institute (TARI) on behalf of FICCI Committee Against Smuggling and Counterfeiting Activities Destroying Economy (CASCADE). to be emphasized before this audience and all those who read and make use of it. Our industry and government is very concerned about weak intellectual property protection and enforcement in India. The exponential involved has allowed criminals, including organized crime rings, to become very active, counterfeiting virtually everything including, for instance, pharmaceutical products, electrical products, software, movies, food, wine, personal care products, automobile parts drain on the economy and is responsible for loss of employment, a reduction in tax revenues for governments, and poses serious consumer health and safety risks due to the poor quality of products and sometimes hazardous nature of the fakes. Virtually no industry escapes this illegal activity. of Counterfeiting, Smuggling and Tax Evasion in Seven Key Indian Industry Sectors.” will demonstrate that India is serious about adequately protecting its knowledge based economy. Indian industry urges the government to make this a priority. Arbitrage Research Institute (TARI) and it is hoped that this research will be useful for consumers; industry, policy makers, researchers and other stake holders in order to begin to comprehend the problem that the nation is faced with and would face if efforts are not made sooner than later to curb this menace. Meenu Chandra FICCI- CASCADE
  9. 9. counterfeiting, smuggling and tax evaded goods. Existence and operation of illicit markets is an enduring problem that escalates each day in scope and magnitude and impacts industries, consumers, government and economies as a whole. The market for fake or counterfeit or smuggled products is one of Counterfeiting is commonly understood as any process of fraudulently manufacturing, altering, or distributing a product that is of lesser value than the genuine product with the intention of misleading the buyer about the genuineness of product. Smuggling refers to import or export of goods secretly contrary to the law and especially without paying duties imposed by law. Tax evaded goods are those which are produced/ imported without paying legally required taxes. The taxes evaded may include excise duty (value added tax), sales tax, customs duty, service tax etc. size, tax arbitrage, rise of genuine brand power (that may be replicated), moderate investment and technology requirements, easy access to distribution channels, ease of concealing operations coupled with poor enforcement. Changing consumer preferences such as high value/price consciousness, low prices of fakes coupled with acceptable perceived quality, low health and safety 1 2 There are study reports, research papers and other publications available from international bodies on extent of counterfeiting/ industry and government to initiate remedial, enforcement and policy responses. FICCI Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE) has commissioned this study and made a pioneering attempt to estimate the size of “grey market “ for selected industry sectors in India and to project the basis of the CASCADE Committee’s industry member business experience and feedback from their customers, where counterfeiting is perceived to be prevalent and where public welfare, safety issues become a key concern. The sectors are: The study began with the literature survey of various estimation methods used by international research reports and concluded that each method of estimation has limitations on account of data availability and underlying assumptions and no single method can be 1 Economic Impact of Counterfeiting and Piracy, OECD, 2008 2 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011 Executive Summary Auto Components Alcohol Fast Moving Consumer Goods (Personal Goods) Mobiles Phones Computer Hardware Fast Moving Consumer Goods (Packaged Foods) Tobacco
  10. 10. 11 used across all the industry sectors. Therefore the study used the following approach: Micro, Small and Medium Enterprises (MSME). The study calculates the “difference” arising between consumption expenditure (from NSS data) and value of supply captured from sum of production from factories for domestic consumption (from ASI data), registered micro-enterprises (from MSME data) The “difference” is attributed to the following items: This “difference” expenditure for the sector. On the basis of the grey market percentage so derived the study calculated the loss to the industry on the basis of industry size is computed on the assumption that the gap in demand and supply would be met through domestic production and imports and existence of the grey market results in loss of excise duty/ value added tax, sales tax and import duties. The direct tax loss to government is computed on that could have accrued because of additional would have been taxed at 33% under Income Tax Act. The estimated sales loss to the industry in the crores. Industry Sector Grey Market Sales Loss to Industry (percentage) (Rs Crores) Auto Components 29.6 9,198 Alcohol 10.2 5,626 Computer Hardware 26.4 4,725 FMCG (Personal Goods) 25.9 15,035 FMCG (Packaged Food) 23.4 20,378 Mobile Phones 20.8 9,042 Tobacco 15.7 8,965 Total Sales Loss 72,969 Estimated Sales Loss* to Industry (seven sectors) 1. Landscape Study 3. Summary 2A. Data Analytics Data from other Sources 2C. Validation Expert Meetings Industry Association Meetings, Inputs Data Substantiation 2B. Impact Analysis Industry Sector Government Social Impact *The loss has been calculated for the year 2012
  11. 11. 12 The estimate of tax loss to the central and state exchequers for each of the seven selected sectors is summarised in the underneath table. However, the impact of grey market goes beyond loss of sales to industry or revenue loss to the government. grey market operations. would lead to lay-offs; employment of laid-off workers by grey market operators reduces the quality of working conditions and market. One silent victim of the grey market is the environment and the impact of environment degradation is on the most vulnerable of materials used or in disposing waste. There are few global facilities for safe containment or destruction of seized goods or a mechanism to hold the counterfeiter liable for costs of destruction. This study reveals the convergence of four key factors that make the Indian market susceptible to grey market operations. These are: Thus customers face health and safety hazards and genuine manufacturers’ have reduced incentive and motivation to invest in business. Further there have been evidences of counterfeiter-criminal nexus resulting in growth of anti-social activities, violent and organized crime. Estimated Tax Loss** to the Government Industry Sector Direct Tax Loss (Rs crores) Indirect Tax Loss (Rs crores) Tax Loss to the Exchequer (Rs. Crores) Auto Components Alcohol Computer Hardware Tobacco Estimated Annual Loss 3,504 22,686 26,190 **The loss is calculated for the year 2012
  12. 12. 13 to expect any measures to eliminate counterfeiting forever, but the aim should be to make it unattractive for fraudsters to target the company’s products.3 The study suggests these measures to combat grey market operations into areas of: Associations Further, it is recommended that FICCI should seek a mandate formulate an orchestrated strategy with participation from policy makers, representation from enforcement agencies, industry, civil society and organizations working towards ensuring customer factors. The implementation of such strategy needs to be sector merits exclusive consideration. 3 Economic Impact of Counterfeiting and Piracy, OECD, 2008 The study concludes that grey market poses serious challenges to the government, industries and customers. On the one hand customers face health and safety hazards and on the other hand, genuine manufacturers’ incentive and motivation to invest in business growth,researchanddevelopmenttends to decline on account of vulnerability to counterfeitsandfakes.Thecounterfeiter- criminal nexus results in growth of anti- social activities, violent and organized crime. The consequential price paid by society for such incidences cannot be measured only in economic terms but have far-reaching impact on national security and the country’s progress.
  13. 13. Total Annual Sales Sectors studied Auto Components Alcohol Fast Moving Consumer Goods (Personal Goods) Mobiles Phones Computer Hardware Fast Moving Goods (Packaged Foods) Tobacco Auto Components Alcohol Computer Hardware FMCG (Personal Goods) FMCG (Packaged Food) Mobile Phones Tobacco 15.7 20.8 23.4 25.9 26.4 10.2 29.6 72,969 Auto Components Alcohol Fast Moving Consumer Goods (Personal Goods) Mobiles Phones Computer Hardware Fast Moving Goods (Packaged Foods) Tobacco *value in Rs Crores Grey Market (percentage in each sector) (Calculations are for the year 2012)
  14. 14. Study Highlights Auto Components Alcohol Computer Hardware FMCG (Personal Goods) FMCG (Packaged Food) Mobile Phones Tobacco 0 1,750 3,500 5,250 7,000 5,379 2,678 5,108 3,779 1,187 2,250 2,305 861 496 552 867 47 260 421 Estimated Tax Loss* in Direct and Indirect Taxes to the Government 87% 13% Estimated Annual Tax Direct Tax Loss Indirect Tax Loss 26,190 *value in Rs Crores Percentage Share of Direct and Indirect Tax Loss Pharmaceutical and other FMCG sectors (limited study was conducted) 1,00,000 *value in Rs Crores Overall estimate of Annual *value in Rs Crores Infographic/GamePlan
  15. 15. 16 produced or imported from outside and sold in a country by evading taxes. It also includes sale of domestically produced counterfeit (either deceptive or non-deceptive) goods. In common parlance grey market essentially would include counterfeits, smuggling and tax evaded goods. constituents. These terms are often used interchangeably since most of the transactions involve all or some of the elements in conjunction. For instance in case of sale of counterfeited goods, there would always be tax evasion; such goods can be domestically produced or illegally imported from a foreign land. Similarly a smuggling transaction can be a juxtaposition of sale of deceptive/ non deceptive goods involving tax evasion. A grey market necessarily involves buying and selling of goods in an illegal manner. It is also known by names such as illicit trade, black economy, underground market, shadow economy, parallel economy etc. The variety of the goods traded in grey market is enormous ranging from weapons, currency, fashion goods, electronic goods to drugs, alcohol, tobacco, food etc. goods can be sold illegally (production overruns, tax evaded goods, dumping of goods in international trade). The distribution channels used by grey market operators may also be legitimate or illegitimate. The prices in grey market are generally lower than those in the legal market place because such goods are mostly of lower quality and the operators do not have to incur costs such as duties and taxes. Counterfeiting Counterfeiting is considered as one of the world’s fastest growing ‘industry’ and has been more recently referred to as the crime It is an enduring problem that escalates each day in scope and magnitude and impacts industries, consumers, governments and economies. manufacturing, altering, or distributing a product that is of lesser value than the genuine product with the intention of misleading Code, a person is said to “counterfeit” who causes one thing to resemble another thing, intending by means of that resemblance to practice deception, or knowing it to be likely that deception will thereby be practiced. The section explains in detail that it is not essential to counterfeit that the imitation should be exact. Further the section talks about ‘intent’, that is, the intention of a person trying to pass-off a thing as original (unless the contrary is proved) will be considered as deception. Counterfeiting is also an infringement of the legal rights of an owner of intellectual property. The Agreement on Trade-related Aspects on Intellectual Property Rights (the TRIPs Agreement) any goods, including packaging, bearing without authorisation a trademark which is identical to the trademark validly registered in respect of such goods, or which cannot be distinguished in its essential aspects from such a trademark, and which thereby infringes the rights of the owner of the trademark in question under the law of the country of importation. Centre for Business and Economics Research (CEBR) in their study for counterfeiting to include all cases of products which are copied fraudulently and also the case of products which are identical to the original but which are made without the right-holders’ consent. It encompasses all products, processes and services which are the subject-matter or result of an infringement of an intellectual property right (trade mark or trade name, industrial design or model, patent, utility model and geographical indication), of a copyright or neighbouring right (the rights of performing artists, the rights of 4 http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf, last accessed on August 31, 2012 5 Economic Impact of Counterfeiting and Piracy, OECD, 2008 1. Introduction Grey Market = Counterfeiting + Smuggling + Tax Evaded Goods
  16. 16. of the “sui generis” right of the maker of a database.6 However, in practice, the term is allowed to encompass any making of a product which so closely imitates the appearance of the product of another as to mislead a consumer that it is the product of another. Hence, it may also include the unauthorised production and distribution of a product that is protected by other intellectual property rights, such as copyright and neighbouring rights. Trade in counterfeited and smuggled goods is believed to be rising rapidly; counterfeiting and smuggling are said to impact virtually This would cascade into an annual adverse The counterfeit versions of the products are deliberately designed to look exactly like real brand-name products, down to the sporting goods, clothing and accessory brands, and the software, music and video industries, has now grown to include virtually every major product category: soaps, shampoos, razors, batteries, cigarettes, alcoholic beverages, automobile parts, medicines, health care products, and numerous others.11 Counterfeited goods market can be divided into two categories: deceptive and non-deceptive counterfeiting. Deceptive counterfeiting refers to consumers’ purchase of counterfeit products believing they have purchased genuine articles whereby to consumers knowingly buying counterfeit products looking for what they believe to be bargains. Deceptive products compete directly with the genuine products and reduce their sales on one to one basis whereas non-deceptive products are sold at discounts to the original products.12 chain without the knowledge of brand owner or other distribution chain actors, the consumer is generally charged same price as the genuine product. Contrary to this situation, in case of non-deceptive counterfeiting the prices charged are mostly lower/ at times substantially lower than the original product. counterfeiters/pirates with a new and powerful means to sell their products via auction sites, stand-alone e-commerce sites and email solicitations. This study has extensively gone through existing literature and placed the meaning of counterfeiting as a process of fraudulently manufacturing, altering, or distributing a product, mostly of a value lower than the genuine product, so as to mislead the buyer into the genuineness of product. The study encompasses both deceptive and non-deceptive counterfeits. Smuggling Smuggling refers to import or export of goods secretly contrary to the law and especially without paying duties imposed by law.13 or to obtain goods which are prohibited in a certain region. Smuggling severely harms the economy of a country in several ways. It is an act of tax evasion which reduces government revenue those imported through the correct channels, bringing unfair competition to genuine importers/ manufacturers. It also shrinks the prices of the locally manufactured goods thus destroying the market for local products, sometimes leading to the collapse of local industries and loss of employment. Smugglers generate income by avoiding state controls, regulations and related costs. 7 Economic Impact of Counterfeiting and Piracy, OECD, 2008 8 Economic Impact of Counterfeiting and Piracy, OECD, 2008 9 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011 10 http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCEQFjAA&url=http%3A%2F%2Fwww.iccwbo.org%2 FData%2FDocuments%2FBascap%2FGlobal-Impacts-Study---Full-Report%2F&ei=TuVFUObHB4jyrQeivYHwCg&usg=AFQjCNFGG_R7qa1yO8th- bE42bAXud42HJA last accessed on September 4, 2012 11 Global counterfeiting, Background document available at http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last accessed on April 14, 2012 12 Economic Impact of Counterfeiting and Piracy, OECD, 2008 13 The Customs Act 1962, available at www.cbec.gov.in/customs/cs-act/custom-act-1962.pdf, last accessed on August 31, 2012
  17. 17. and money laundering. The probability of being caught and punished by law enforcing authorities depends, to some extent, on a their net gain from smuggling, i.e. the difference of their expected revenues and expected costs, including penalties on their illegal Some researchers have also pointed out that the level of smuggling is highly positively correlated with the level of corruption in both partner countries.16 Tax evasion refers to practices deployed by individuals or corporates to reduce/ evade their tax liability by illegal means. It encompasses deliberate misrepresentations, concealing the true state of affairs and under/ over reporting so as to reduce the tax outgo. Tax evasion has both domestic and international component of direct and indirect taxes. The taxes evaded may include excise duty, sales tax, customs duty, service tax etc. Taxes on goods can be imposed at the time of domestic manufacture or local import as the case may be and at the time of distribution of goods. An overview of the taxes imposed by central and state government is presented in Figure 1. Sales Tax in India is a form of tax that is imposed by the government on the sale or purchase of a particular commodity within the There are two types of taxes levied on the distribution of goods. In case of intra-state sales tax, states levy taxes as per the provisions of local sales tax act. In cases of interstate sale of goods, the goes to State from which movement of goods commenced. 15 http://www.uni-graz.at/socialpolitik/papers/Farzanegan.pdf last accessed on November 4, 2012 cfm?abstract_id=1310068 last accessed on November 10, 2012 Central Government Taxes State Government Taxes Customs Duty(Tax on import) Central Excise Duty ( Tax On Manufacture)* Central Sales Tax State Value Added Taxes Entry Tax Ohter Local Levies * Central Excise Duty consists of basic excise duty, additional duty of excise and special excise duty Figure 1: Overview of Central and State government taxes
  18. 18. purchaser. However tax competition has increased among states to attract investment where by each state provide different location based / entity based exemptions. Many states refund VAT as subsidy for capital investment in selected areas/ sectors. The multiplicity of taxes not only induce competition distortions but also used as a tax evasion tool by unscrupulous operators. It has been noted After 3 years of There have been various reported cases of tax evasion of goods traded during interstate sales whereby the goods may be produced in states with lower rate of taxes and illegally smuggled to other states without paying any taxes on such interstate sale movement. In some cases these goods are shown as intra state sales instead of interstate sales by preparing fake bills and other supporting transactional documents. duty and value added tax causing loss to state government of hundreds of crores. In this case goods from bordering states were shown as local sales thereby avoiding VAT and entry tax. rates of tax, non- realisation of taxes and under assessment. stages. It aims to diminish cascading effect of taxes across the entire supply chain, eliminates multiplicity of taxes, rates, exemptions and exceptions. It brings in uniformity of taxes across the territory, regardless of place of manufacture or distribution. However State Sales Tax/ VAT, CST, Entry Tax and all other cascading-type Central/ State levies on goods and services. This study evaluates the three major components of grey market namely counterfeiting, smuggling and tax evaded goods across the selected seven sectors, to estimate the extent of loss to industry and government. 17 http://www.iica.in/images/GST%20Single%20National%20Market.pdf last accessed on November 9, 2012 18 http://www.cainindia.org/news/8_2012/interstate_racket_of_tax_evasion_busted.html last accessed on November 9, 2012 19 http://news.outlookindia.com/items.aspx?artid=765903 last accessed on November 9, 2012
  19. 19. 2. Rationale to Evolve an Approach for India commissioned by global industry associations working on anti-counterfeiting endeavours, academic research and other bodies (including corporate houses). The counterfeiting because of varying assumptions on substitution of legitimate products with pirated goods across industries. Hence, each method of estimation has limitations on account of data availability and underlying assumptions and no single method can be used across industry sectors. - types of counterfeited and pirated goods and industries involved, no single method can be used to develop estimates. Each method 21 The OECD study22 calculated international trade in counterfeit and pirated products excluding goods domestically produced and search and seizure data and statistical modelling to determine demand and supply of the counterfeit and pirated products. The BASCAP study23 domestically produced goods and pirated digital products distributed via internet. This study used the counterfeiting percentage Centre for Business and Economics Research (CEBR) . There are mainly three sources of information to calculate economic cost of counterfeiting which are enforcement and judicial agencies, companies and industry bodies and economic impact studies by research consultancies. consumption rather than production of counterfeits and pirates on rationale of ease and cost. Further consumption data facilitates calculation of socio-economic damage from counterfeiting.26 There are three different units of measurement: volume, value and people-based measures. Volume measures the actual number of counterfeit and pirate items which can be expressed as a number of units or as a share (or percentage) of all legitimate and counterfeit items. 20 Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods, GAO, 2010 21 http://www.gao.gov/assets/310/303062.html last accessed on September 4, 2012 22 Economic Impact of Counterfeiting and Piracy, OECD, 2008 23 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011 25 last accessed on September 3, 2012 26 last accessed on September 3, 2012 Research Methodology Demand Size Estimation Sample Questionaire Consumer/ Member Survey Supply Size Estimate Search & Seizure Data Mystery Shopping
  20. 20. 21 value (of genuine goods) or intrinsic price basis (consumer price if aware of fake status) or cost basis (total cost of input materials, labour The level of counterfeiting activity can also be measured on the basis of usage of input materials indicating production of counterfeit output or counterfeits manufactured/ distributed or consumer purchase or product usage and disposal. The seizure and enforcement data help provide estimates of level of manufacturing/ distribution of counterfeits. Consumer purchase/ usage/ disposal of counterfeits can be assessed through surveys of retailers/ consumers or through mystery shopping exercises. Seizures and convictions made by customs and other enforcement authorities are an easy and readily available source of in estimating the detection rate will make little difference to the estimate of total activity. The OECD study recommends that seizure and conviction based data should only be used as the primary basis for estimating counterfeiting activity when the detection rates Sample surveys take evidence acquired directly from a small representative group of the population and use statistical analysis to draw robust conclusions about the population at large. Sample surveys of producers, distributors or retailer can be conducted Consumer surveys can be done in case they are aware of the consumption of counterfeit products. In such a case multiple products questionnaire may be used to reduce costs. Survey may also be conducted among legitimate businesses to ask for their estimates of the level of counterfeiting and piracy in their markets. The OECD study advises that questionnaire should be designed on the basis of qualitative research and be pilot tested. Independent market research agencies should be appointed for collection and analysis of data. Computer Aided Self interview (CASI) research respondents leading to improved response rates and robust results. The sample responses can be obtained by postal self- completion, omnibus surveys, telephone interviewing, face-to-face interactions or CASI.31 Mystery shopping technique combined with expert evidence can also be used for ascertaining the level of counterfeiting activity. Mystery shopping samples products and covers illicit and informal retail channels. The robustness of estimates depends on consumers. Further sample testing is done in association with the legitimate brand owners. However, it is not possible to identify production overruns using this method and it is relatively high in cost on account of sample testing and expert advice costs.32 is a tendency to understate the size of the problem on account of non-spotting of such products. It recommends use of mathematical models to predict which countries and products are likely to have a higher or lower incidence of counterfeiting and piracy. The model uses factors like production costs, barriers to legitimate entry, detection and enforcement intensity, ease of detection and enforcement, proximity to source of production or point of entry, elapsed production and distribution time, legal penalties and sunk costs in production to develop a scoring model. method for measuring counterfeits of various products.33 should only be used as the primary basis for estimating counterfeiting or piracy activity when either detection rates (proportion of The prevalence of counterfeits is generally only known when the perpetrators are caught which is not a true estimate of the menace. Indian Context Adopting the methodologies used to estimate the counterfeit market sizes in advanced economies may not work in the Indian context. For example, the method to use search and seizure data to estimate the Indian counterfeit market was unlikely to yield enforcement agencies. Secondly, the method to adopt customer survey and mystery shopping to estimate multi-sector Indian counterfeit market was also unlikely to be effective. In such mystery shopping there may be a tendency to understate the size of the problem on account of non- spotting of such products or overstate the size of the problem by taking samples from areas prone to higher distribution 27 last accessed on September 3, 2012 28 last accessed on September 3, 2012 29 last accessed on September 3, 2012 30 last accessed on September 3, 2012 31 last accessed on September 3, 2012 32 last accessed on September 3, 2012 33 last accessed on September 3, 2012 34 Counterfeit Pharmaceuticals – Update on Current Status and Future projections available at , last accessed on September 18, 2012
  21. 21. 22 validation supplement not as the core approach. - ous range of types of products that are counterfeited ranging from luxury items (such as deluxe watches and designer clothing), to essentials (such as pharmaceutical products, food and drink, medical equipment, personal care items, toys, tobacco and automo- tive parts). Each industry situation is unique, necessitating tailor made analysis techniques. 35 35 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012
  22. 22. 23 In today’s sophisticated global economy with easy and widespread access to technological advances, there are virtually no product lines, corporations, or consumers that escape the reach of counterfeiters and/or pirates. It is easy to duplicate labels, packaging, documentation, authentication devices and/or symbols/marks/logos with speed, accuracy and relative anonymity. The counterfeit products are designed to be almost perfect replicas of the genuine product, so people may not know a counterfeit when they see one.36 to the rapid increase experienced during the last few decades. The factors driving demand for counterfeits can be both from demand side and supply side. The drivers for known consumer demand for counterfeit or pirated products are low prices, acceptable perceived quality, ability to conceal status, no health concerns, 38 Further counterfeited goods suppliers are motivated by , large potential market size, genuine brand power, to deceive consumers, low risk of discovery, availability and ease of acquisition, legal and regulatory framework, weak enforcement and penalties. 39 ways to make them indistinguishable from the original. The counterfeit goods can then be sold through parallel markets, or even introduced into the licit supply chain. Many otherwise law-abiding citizens think nothing of buying a knock-off version of a designer 36 http://counterfeiting.unicri.it/docs/International%20AntiCounterfeiting%20Coalition.White%20Paper.pdf last accessed on March 5, 2012 37 Economic Impact of Counterfeiting and Piracy, OECD, 2008 38 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 39 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 3. Factors Contributing Towards Smuggling/ Counterfeiting/ Technological Advances original manufacturer and counterfeiter New techniques enable the faking of high tech products Emerging Markets Free Markets growth Enforcement agencies or institutions not growing commensurately Increased International Trade International trade including trade in counterfeited goods has increased substantially Resource constraint with customs authorities of most countries leading to reduced surveillance Emerging Products Share of manufactured and processed products increasing in international trade Manufacturing almost 75% of world trade Factors Contributing Towards Counterfeiting Figure 2: Factors contributing towards Counterfeiting/Smuggling/ Tax Evaded Good
  23. 23. product. Though many are aware that the loss of income reduces the incentives for creativity, the impact seems too remote and the name or brand. In some cases, as with counterfeit currency, the goal is to directly deceive the consumer. No intelligent human being choose to buy a fake Rolex watch because they want the status associated with the brand, but they do not want (or can’t afford) to pay the price of a real Rolex. In these cases, the imitation must be good enough to resemble the original, but it need not meet the standards of close examination and quality. Finding the source of any given counterfeit in this labyrinth of parts suppliers, tool makers and assemblers can be a daunting task. The impetus for a counterfeit product can come from many sources. Those with a ready overseas market for a particular product risk-to-reward balance that favours criminal activity. To date, anti-counterfeiting laws have been non-existent or the penalties imposed by most governments are vague or not tough enough to act as a deterrent. The result is the growth of large-scale manufacturing and distribution of counterfeit products. The laws on counterfeiting are often unclear or piecemeal, leading to ad hoc enforcement and gaps that criminals can exploit. Few countries’ laws recognize counterfeiting as a tobacco also provide a major incentive for counterfeiting. In most of the countries, government enforcement resources are limited technological development is enabling counterfeiters to produce fakes relatively cheaply and easily. The distribution of fakes is becoming increasingly sophisticated through international networks and the range of products targeted has widened, increasing the total market for fakes. On the other hand, there is a greater awareness among enforcement agencies and the public about the health and safety risks of fakes, intellectual property protection has been improved throughout the world and companies are able to protect their products with increasingly sophisticated anti-counterfeiting technologies. market, tax arbitrage, rise of genuine brand power (that may be replicated), moderate investment and technology requirements, easy access to distribution channels, ease of concealing operations coupled with poor enforcement are some of them. Another set of factors that contribute to grey market pertain to consumer preferences: high value/price consciousness, low prices of fakes Successful brands are counterfeited and sold in India because of the big size of the domestic market, high price sensitivity, improper coordination among enforcement agencies, and lack of knowledge among customers. Tax Rates and Tax Evasion From the above discussions we can conclude that tax evasion is prevalent across all the grey market operations whether it pertains to counterfeiting, smuggling or tax evasion. The grey market operations are principally undertaken in a deceitful manner where tax laws are evaded and no legitimate taxes are comparison to the original manufacturers. Tax evasion is part of a set of events linked to tax policy which includes complexity of taxation systems, enforcement and attitudes towards the authority of the state. Tax evasion, the intentional failure to declare taxable economic activity, is pervasive in several 40 Cunterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo- ber 22, 2012 41 global Financial Integrity available at last accessed on September 18, 2012 42 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo- ber 22, 2012 43 Global counterfeiting, Background document available at http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last accessed on April 14, 2012 44 Economic Impact of Counterfeiting and Piracy, OECD, 2008 45 Economic Impact of Counterfeiting and Piracy, OECD, 2008 46 http://www.kpmg.de/docs/Combating_Counterfeiting_and_Grey_Market_A_Challenge_for_Indian_corporates.pdf last accessed on March 12, 2012. 47 Tax Rates and Tax Evasion: An Empirical Analysis of the Structural Aspects and Long-Run Characteristics in Italy available at http://ftp.iza.org/ dp3447.pdf last accessed on November 16, 2012
  24. 24. is residual uncertainty surrounding the accuracy of measurements, even the most conservative estimates suggest the hidden where it is much higher. The substantial size of the hidden economy, and the tax evasion that accompanies it, require understanding so that the effects of policies that interact with it can be correctly forecasted. However, there is a fundamental difference between tax evasion and tax avoidance: “When the law draws a line, a case is on one side of it or the other, and if on the safe side is none the worse legally that a party has availed himself to the full of what the law permits. When an act is condemned as evasion, what is meant is that it is on the wrong side of the Line”49 Tax evasion is also different from tax arbitrage where the individuals or organisations take advantage of inconsistencies in tax laws featuring economically offsetting positions which have asymmetric tax treatments. The term tax arbitrage refers to trading that For instance, there is difference of tax rates in certain products among various states in India, which encourage business investments in one state more than another, resulting in tax arbitrage. This is essentially applicable for the products which do not appear in the central list for taxation and where excise duty or value added tax (VAT) is levied by states. As an illustration of tax arbitrage the differential tax rates applied on alcohol across certain states of India are presented in the below mentioned Table 1. Does incidence of high tax rates lead to tax evasion? This sub section discusses the role of tax rates in pushing persons/ organisations towards tax evasion which, in most societies, are met with penalties and prosecutions. There are, of course, several reasons for tax evasion, however high tax rates are viewed in both empirical and theoretical studies as the principal determinant of tax evasion and the shadow economy. The tax burden is one of the most commonly cited determinants of tax evasion and, in general, of the underground economy. The overall tax burden is a key feature for working and producing in the hidden sector and for concealing income and wealth. also enhances propelling the evaders towards taking the risk of being caught and punished. 48 Tax Compliance and Evasion available at http://www.ic.keio.ac.jp/en/download/jjwbgsp/description/F7_Tax%20Compliance%20and%20Eva- sion.pdf last accessed on November 16, 2012 49 http://elsa.berkeley.edu/~saez/course/Slemrod,Yitzhaki%20PE%20Handbook%20chapter.pdf [Bullen v. Wisconsin (1916), 240. US. 625 at p. 630/. last accessed on November 16, 2012 50 http://elsa.berkeley.edu/~saez/course/Slemrod,Yitzhaki%20PE%20Handbook%20chapter.pdf last accessed on November 16, 2012 51 last accessed on November 14, 2012 52 See, amongst others, Tanzi (1982), Feige (1989), Thomas (1992), Lippert and Walzer (1997), Schneider and Enste (2002). 53 Tax Rates and Tax Evasion: An Empirical Analysis of the Structural Aspects and Long-Run Characteristics in Italy available at http://ftp.iza.org/ dp3447.pdf last accessed on November 16, 2012 Table 1: State Tariff* on Alcohol State VAT Rate (%) Jharkhand Delhi Haryana Maharashtra Meghalaya *http://www.allindiantaxes.com/vat.php last accessed on November 14, 2012
  25. 25. 26 is increased. in the marginal tax rate occurs when the net income of a taxpayer does not vary as a consequence of the change in the marginal tax rate. An increase in the tax rate leads to a larger amount of unreported income or alternatively when the tax rate increases, taxpayers could end up reporting less income under decreasing absolute risk aversion. demonstrated that higher tax rates provoke tax evasion when they looked at how importers so intense that “tax increases may even produce a reduction rather than an increase in tax revenues.” They examined detailed Hong Kong versus what was reported by China. In general, import taxes are based on the value and category code assigned to particular goods. In industries characterized by observed that there are widespread practices of underreporting unit value of the imports and mislabelling higher-taxed products evasion. Thus tax evasion and tax structures are positively skewed towards each other. However more empirical research using time series analysis and experiments is needed to ascertain the extent of co-relationship between tax rates and evasion in the Indian context. 54 Tax Compliance and Evasion available at http://www.ic.keio.ac.jp/en/download/jjwbgsp/description/F7_Tax%20Compliance%20and%20Eva- sion.pdf last accessed on November 16, 2012 55 Clotfelter, C. 1983. Tax evasion and tax rates: An analysis of individual returns. Review of Economics and Statistics 56 Tax evasion and relative tax contribution, By Judith Panade´s available at 57 Tax Rates and Tax Evasion: Evidence from ‘Missing Imports’ in China (NBER Working Paper No. 8551), last accessed on November 16, 2012
  26. 26. Operations Government EconomyOriginal Right Holder Indirect) Anti-Counterfeiting Customs Seizures, Campaign (Monetary Compenation, Healthcare) Infringement of copyrights (Royality loss, non-recovery capital costs) Special advertisment campaigns Reputational risk Increase in black money terrorism Reduced employment, deteriorating working conditions Environment degradation development expenditure Consumers Defrauded, Health Care Cost ( Hospitalization, Medicines) Thus counterfeiting can have broad economy-wide effects on trade, foreign investment, employment, innovation, criminality and the environment. Concerning the microeconomic effects, the sales volume, prices and costs of rights holders are impacted, as are investment, royalties and brand value. For consumers, counterfeit and pirated products may offer cheap alternatives to genuine goods but are usually of inferior quality. For certain types of infringing goods, the health and safety of consumers may be put at an “underground economy” that deprives governments of revenues for vital public services, forces higher burdens on tax payers, dislocates hundreds of thousands of legitimate jobs and exposes consumers to dangerous and ineffective products. others are put forward by journalists. Hence this research report discusses the consequences of grey market operations which adversely impacts various stakeholders. 58 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011 59 Economic Impact of Counterfeiting and Piracy, OECD, 2008 government and economies as a whole. The market for fake or counterfeit or smuggled products is thriving in India and has become one of the biggest challenges faced by Indian industry even impacting ‘Brand India’ globally. dangerous causing health and safety concerns but also undermine product innovation initiatives thereby limiting economic growth. Some economic costs or the additional costs on account of grey market operations incurred by various stakeholders.
  27. 27. Impact on Original Right Holder/Manufacturer The most accessible metric for original manufacturer is loss of revenues, and so counterfeiting/ smuggling is often reduced to a revenue issue, despite being much more than that. The costs to those businesses whose products are counterfeited/ smuggled include: (i) loss of sales; (ii) competitive disadvantage to those enterprises which free-ride on the research and development and marketing expenses of legitimate enterprises; (iii) the possibility of product liability from defective imitation products; (iv) loss of goodwill and prestige by a brand, where counterfeits are freely available; and (v) the expense of monitoring the market and instituting legal proceedings against infringers.61 counterfeiters suffer a direct loss in sales. Indeed, some markets are even dominated by counterfeiters, creating barriers of entry for the producers of the genuine product. Some would argue that the buyers of the fakes would not have bought the genuine item but that seems a very narrow argument and can only apply to a small segment of luxury goods.62 In addition, consumers who are deceived into believing that they bought a genuine article when it was in fact a fake, blame the manufacturer of the genuine product when it fails, creating a loss of goodwill. Even cheaper and obvious copies that are bought in good faith represent a serious threat to the company that wants its brands associated with quality and exclusivity.63 The branding of a product provides implicit quality assurance and a legal line of accountability that consumers have come to becomes impossible to distinguish the real from the counterfeit, poor quality products destroy the reputation of the copied brand, and the cheaper goods will inevitably dominate. investment in research, design and quality, and help in creating and maintaining consumer satisfaction and loyalty. Counterfeiting erodes consumer trust in brands. Counterfeiting on a huge scale or where the counterfeit products are harmful to consumers can destroy trust. it is to be copied by counterfeiters. However, the impact is not limited to large global brand-owning companies. Small successful brands are also impacted. intellectual property rights. The right owner becomes involved in costly investigations and litigation when combating counterfeiters and may also have to spend further departments such as marketing, human resources, product development and legal departments. Fakes create a parallel grey market, nearly identical to the original and eating into its share, yet not nearly as accountable. They product failure). As a result the incentive for innovation and the funds required for research and development in an economy reduce, forming a vicious cycle.66 Thus counterfeiting undermines innovation, which is key to economic growth.67 The counterfeiters of status goods unbundle the status and quality aspects of the product, and thereby allow some consumers to purchase the former who would not be willing to pay the high price of purchasing the two together. Counterfeiters also dilute their customers the prestige associated with a small, select network of users, when a fringe of imitators allows consumers with less discerning tastes to enter the club. societies and humanity. The challenge for the international development, human rights and business communities is to build on 60 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo- ber 22, 2012 61 European commission impact of counterfeiting available at - toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 2012 62 Economic Impact of Counterfeiting and Piracy, OECD, 2008 63 Economic Impact of Counterfeiting and Piracy, OECD, 2008 64 Global counterfeiting, Background document available at http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last accessed on April 14, 2012 65 Economic Impact of Counterfeiting and Piracy, OECD, 2008 66 Final report for the European Commission Directorate-General Single Market 15 July 2002, Centre for Economic and Business Research 67 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 68 NBER Working paper series, Foreign Counterfeiting of status goods, Available at SSRN: http://ssrn.com/abstract=344754
  28. 28. Thus rights holders or genuine product manufacturers face reduction in sales volume, downward pressure on prices, erosion measures, and limitations on the scope of business operations. Increased costs relate to product protection, packaging, litigation, investigation and research, cooperation with the government, public awareness and liability on account of claims settlement for the right holders/ original goods manufacturers. Revenue loss is not just restricted to the original manufacturer. It is axiomatic that counterfeiters do not pay taxes and as a result, product segments e.g., liquor, luxury goods, imported items, etc. where the margin mark-up due to excise and other forms of taxes Counterfeit products are often smuggled, both to circumvent problematic inspections and to evade import taxes. Since they are generally retailed irregularly, sales taxes are avoided. Tax evasion also allows counterfeit goods to be priced extremely competitively, tax base, and thus affect public services available for all. public institutions are weakened when criminal networks use corruption to facilitate their counterfeiting and piracy activities.73 There are also instances of increased expenditure on public welfare by state agencies to compensate the consumer and society in general for the miseries suffered on account of using counterfeits. Impact on Economy The socio-economic effects of counterfeiting generally are: reduced incentive for innovation adversely impacting growth rates, foreign direct investment structural changes, and negative trade impact owing to safety and health concerns.74 At the macro-economic level, its effect is observed through lower investment levels in the economy, lower overall employment and a reduced rate of economic growth. It destabilises trade, discourages innovation and potentially restricts growth and competitiveness of an economy. The countries where counterfeiting takes place suffer both tangible and intangible losses. Foreign producers of reputable products become reluctant to manufacture their products in countries where counterfeiting is rife as they cannot rely on the enforcement of their intellectual property rights. Hence, such countries not only lose direct foreign investment but also miss out on foreign know- how. Further if many products from such countries including genuine ones gain a reputation of being of poor quality, it will cause export losses which in turn implies both job losses and loss of foreign exchange. It could be argued that the counterfeiting industry also creates jobs but these jobs are often poorly paid, involve substandard working conditions, inadequate protection of labour rights and sometimes use child labour. The foundation for new business development in a country is the existence of a legal system to protect the rights of the entrepreneur and to promote fair competition. The prevalence of counterfeiters in a market discourages inventiveness in that country since it deters honest producers from investing resources in new products and market development. The easy availability and production of counterfeit products in a particular country would alert vigilant consumers throughout the world about the product quality of that particular product and similar such products manufactured in that country. This would create a reputational risk for the whole economy and gradually affect the business and trading environment of the economy. The most serious consequence of trade in counterfeit and pirated products is the stimulation of organised criminal activity and the consequential effect upon public and private corruption. This penetration of organised crime into otherwise lawful economic sectors participate or go out of business. If they decide to join in, they may be forced to do other kinds of business with organised crime. 69 Opinion on the compatibility of the Anti-Counterfeiting Trade Agreement (ACTA) with the European Convention on Human Rights & the EU Charter of Fundamental Rights by Douwe Korff & Ian Brown 70 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 71 Press release by Holostik India Ltd., 2005 (http://www.holostik.com/about_press.html) 72 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo- ber 22, 2012 73 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 74 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 75 last accessed on September 3, 2012 76 Economic Impact of Counterfeiting and Piracy, OECD, 2008 77 last accessed on March 13, 2012 78 European commission impact of counterfeiting available at - toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 2012
  29. 29. attracts organised criminal groups and terrorist organizations due to low risk of prosecution (on account of non-traceability) and poisons or biological toxins (in pharmaceutical sector). The counterfeit goods producers have no incentive to meet labour or environmental standards. This opens the door to issues such as child labour and dangerous working conditions, as well as environmentally dirty production which could threaten the community at large. As counterfeiting is an illicit activity, they often attract criminal elements, who will use their gains from these activities to indulge in further criminal activities. Since they operate beyond the pale of law they tend not to observe basic employment standards, will avoid contributing to public revenues through the payment of taxes and excise and have little concern that the products which they produce are of an acceptable consumer standard and safety. Even as the major brands work to improve labour standards and workplace safety at their outsourced manufacturing sites, counterfeit goods producers take advantage of global sweatshops. As licensed manufacturers try to improve their environmental impact standards, counterfeiters enjoy the cost savings of dirty production. As the international community attempts to establish good practice standards for industry, counterfeiters undercut them. In addition, they impose the cost of tracking and countering the counterfeits on the legitimate industry. has brought the positives of increased commerce and opened India up for direct foreign investment, which is excellent for the country’s economy. However, India’s status as a low-cost manufacturing base also opens it up for use by counterfeiters as a prime location for the production of counterfeit goods both for domestic sale and export. The ease with which counterfeiters have been able to penetrate the market with ‘look-alikes’ that are completely indistinguishable from branded products has spread alarm throughout the Indian business community and government circles. Impact on Consumers in both developing and developed countries. These losses not only effect the producers of genuine items, but they also involve social costs. The ultimate victims of unfair competition are the consumers. They receive poor-quality goods at an excessive price and are exposed to health and safety dangers. The dismal impact on consumers is health and safety risks which can be life threating in certain situations, and also involve non- 89 Substandard and dangerous counterfeit goods can cause injuries and deaths triggering concern for public health and safety risks. It can take lives instead of treating ailments in case of pharmaceuticals, cause road mishaps/ accidents in case of faulty auto/ aviation components and cause consumer allergies, abnormal health in case of contamination in shampoos, milk powders etc. Counterfeiters risk the health and safety of consumers whereas legitimate businesses lose revenues. when they buy counterfeits, the actual value of the product is normally much lower. Hence, they end up paying an excessive price for an inferior product. The inferior quality of many counterfeits, particularly those relating to health and safety, have proven to have pharmaceuticals in hospitals. 79 Op.Cit.( footnote 8) 80 Global Financial Integrity available at last accessed on September 18, 2012 81 European commission impact of counterfeiting available at - toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 2012 82 Economic Impact of Counterfeiting and Piracy, OECD, 2008 83 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo- ber 22, 2012 84 Op.cit.( footnote 7) 85 Asian Patent Attorneys Association India, Anti-Counterfeiting Committee Report, India available at http://www.apaaonline.org/pdf/APAA_59th_ council_meeting_Manila/AntiCounterfeitingCommitteeReports2011/2-INDIA-Anti-CounterfeitingCommitteeReport-ANNEX2011.pdf 86 CII, Technology solutions, A primer for combating and piracy available http://www.pacmed.ca/Resources/Counterfeiting%20and%20Pira- cy%20i.pdf last accessed on August 31, 2012 87 European commission impact of counterfeiting available at - toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 2012 88 Economic Impact of Counterfeiting and Piracy, OECD, 2008 89 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 90 International Anti Counterfeiting Coalition (IACC) White 91 last accessed on September 3, 2012 92 Economic Impact of Counterfeiting and Piracy, OECD, 2008
  30. 30. 31 Counterfeit auto parts are not subjected to the rigorous safety testing borne by their licit counterparts. Counterfeit medicines may The safety hazards of knock-off designer handbags are less obvious than dilute penicillin, but all counterfeits undermine national and global attempts to regulate commerce in the common interest. To the extent that consumers participate in a contraband market, this undermines respect among ordinary citizens for the rule of of participating in a contraband market is that it serves to sanction tax evasion and other forms of law breaking. alcohol, cigarettes, foods, and personal care items. Injuries and harm from counterfeits include death, blindness, headache, illnesses, swelling and rash, failure to recover from illness, burns, hospital admissions and other adverse reactions. Crime, terrorism and the attendant mental and physical health consequences are associated with counterfeit goods. The types of injuries commonly recognized by the public health information systems are the same or similar to those caused by counterfeit goods. academic institution, nor agency has published materials on counterfeit good related injuries and their consequences to public nor for them as a mechanism of injury. In short, the impact of product counterfeiting is long-term, subtle and diffuse. Deaths, many of which occur in developing countries, are often not tied back to the counterfeit product, or if they are, there is little organized response. As a result, the impact of Counterfeiters of status goods impose a negative externality on consumers of genuine items, as fakes degrade the status associated alter the competition among oligopolistic trademark owners. 93 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on October 22, 2012 94 European commission impact of counterfeiting available at customs_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 2012 95 Counterfeit Goods and the Public’s Health and Safety, International Intellectual Property Institute, at www.iipi.org 96 Counterfeit Goods and the Public’s Health and Safety, International Intellectual Property Institute, at www.iipi.org 97 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo- ber 22, 2012 98 NBER Working paper series, Foreign Counterfeiting of status goods, Available at SSRN: http://ssrn.com/abstract=344754 Thus, grey market operations impact legitimate businesses, causing loss of sales, lower income and damaged brands, they may have to cut jobs and reduce investments leading in turn to lower economic growth*
  31. 31. 32 tax evaded goods. This review included global studies commissioned by public institutions and agencies of repute, industry associations working on anti-counterfeiting endeavours, academia and major corporates. OECD domestically produced and consumed counterfeit and pirated products and the pirated digital products being distributed via the than informal markets. The Internet has provided counterfeiters/pirates with a new and powerful means to sell their products via auction sites, stand-alone e-commerce sites and email solicitations. BASCAP goods and pirated digital products distributed via internet. The impact of counterfeiting and piracy on government tax revenues, legitimate employment, increased costs of crime, economic costs on consumer health and safety and downward pressures on International Anti-Counterfeiting Coalition (IACC) made criminal counterfeiting an attractive enterprise for organized crime groups. There are connections between intellectual property theft and terrorist groups and terrorists can use intellectual property crimes not only as a source of funding but also as a means of attack. GAO of legitimate products with the pirated goods across industries. Hence each method of costs estimation has limitations on account of data availability and underlying assumptions and no single method can be used across industry sectors. Anti-Counterfeiting Trade Agreement (ACTA). It builds on framework. The draft ACTA calls for increased use of criminal and civil penalties against people using copyright circumvention infringing material. ACTA binds negotiating states and creates a new international standard which is likely to be imposed on third countries in future trade agreements. The current draft threatens fundamental rights in countries such as the right to freedom of expression and information, right to protection of personal data and fair trial/due process issues related to other fundamental rights. It was negotiated holders. It has resulted in disproportionate protection to big business. respectively. 99 Economic Impact of Counterfeiting and Piracy, by OECD 2008 100 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP report, February 2011 101 International Anti Counterfeiting Coalition (IACC) White Paper 102 Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods, By GAO, April 2010 103 Opinion on the compatibility of the Anti-Counterfeiting Trade Agreement (ACTA) with European Convention on Human Rights & the EU Charter of Fundamental Rights, By Douwe Korff & Ian Brown
  32. 32. 33 In the previous sections we have outlined the impact of counterfeiting and smuggling on various stake holders such as original right holders, government, society and economy as a whole. An accurate measurement of the true costs of counterfeiting and smuggling goods. In the absence of reliable data, governments and consumers are left to conclude that the problem is not a priority or that it is a problem for the business sector alone to deal with. There are studies, reports, research papers and other publications available from international bodies on the extent of counterfeiting/ Destroying the Economy (CASCADE) based on their business experience and feedback from their customers, where counterfeiting is perceived to be prevalent and where public welfare, safety issues become a key concern. The sectors have been selected on the basis of meticulous discussions and assessment of the key health risks emanating into substantial social impact associated with various industry sectors. objectives: clandestine activity and fakes are produced, distributed and sold outside the recorded market. Virtually no counterfeiters register is extremely challenging. Illegal businesses do not report information on their activities to any government agency so measuring their size must be done using indirect methods. Thus reliable information on the scope, scale and costs of counterfeiting and smuggling is critical for helping policymakers to better 104 Economic Impact of Counterfeiting and Piracy, OECD, 2008 105 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011 106 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011 Auto Components Alcohol Fast Moving Consumer Goods (Personal Goods) Mobiles Phones Computer Hardware Fast Moving Goods (Packaged Foods) Tobacco
  33. 33. 6. Approach to the Study FICCI CASCADE members and industry representatives. The categories covered in each of the industry sectors are given in Table 2. counterfeiting because of varying assumptions on substitution of legitimate products with the pirated goods across industries. Each method of estimation has limitations on account of data availability and underlying assumptions and no single method can be used across industry sectors . Accordingly, this study looked at each of the selected sectors differently to assess the economic loss and, like all other research studies, could also have its limitations. The overall approach and data analysis methodology followed to estimate the size of the counterfeit market along with analysis for each of the selected industry sectors is 107 Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods, GAO, 2010 Table 2: Products covered in this study for each selected sector Auto Components clutch, fuel pumps, ignition coils, induction coils, lamps, shock absorbers, transmis- products. Alcohol Computer Hardware Cosmetics, hair care, perfume, shaving cream, toiletries, soaps, oral care and other personal care products. Aerated drinks, beverages, juices, jams, milk products, baby food, biscuits, breads, butter, cakes, sugar confectionaries, edible oil, ghee, noodles, sauces, pickles, salted refreshments, coffee and tea. Mobile phones Tobacco Cigarettes and smokeless tobacco products 1. Landscape Study 3. Summary 2A. Data Analytics Data from other Sources 2C. Validation Expert Meetings Industry Association Meetings, Inputs Data Substantiation 2B. Impact Analysis Industry Sector Government Social Impact Figure 4. Overall Approach
  34. 34. Micro, Small and Medium Enterprises (MSME). The study experienced data quality and availability issues which were resolved through primary surveys, industry consultations required. Supply Side Estimation Gross Sales Value as per ASI Annual Production Amounts of MSME The ASI data captures production of units registered under the Factories Act. However, in India, there is a large number of Micro, of factory under the Factory Act as covered by ASI, it can be assumed that small and medium enterprises would have been covered by ASI. Hence only annual production of micro enterprises which are engaged in manufacturing activities is required to be extracted from the MSME annual production. results give details of the registered units, segregate such units into Micro, Small and Medium Enterprises and map their products In this study, the value of the goods manufactured from registered Micro Enterprises and supplied to the selected industry sectors Value of Goods Imported Table 3. Particulars of ASI data points evaluated S.No. Particulars Description of data series Data Points evaluated 1 Annual Survey of Industries Factory wise details of the manu- facturing activities pan India for value, multiplier, ASICC Code etc. 2 Annual Survey of Industries Factory wise details of the manu- facturing activities pan India for value, multiplier, ASICC Code etc.
  35. 35. 36 Consumption/ Demand Side Estimation (NSS) is one of the largest sample survey of its kind and collects data on household characteristics such as household size, principal and secondary occupation, household type, religion, social group, land ownership/ possessed/ leased, land cultivated, land irrigated, primary source of energy, household ownership, ceremony performed, number of meals served to outsiders and The difference between consumption and supply is taken as a proxy for estimating the grey market. To summarize, micro and small enterprises and imports from countries outside India. Table 4 Particulars of NSS data points evaluated S.No. Particulars Description of data series Data Points evaluated 1 National Sample Survey (Round 66) Household consumer expenditure for the period July Item code, subsample code, consumption value, multiplier, weight to be applied, NSS/ NSC code. 2 National Sample Survey Household consumer expenditure for the period July subsample code, consumption value, multiplier, weight to be applied, NSS/ NSC code. Supply Total Supply = Gross Sales Value as per ASI+ Import Value of goods imported + Annual Production Amounts of MSME Total Consumption = Annual Consumption Expenditure derived from NSSO for last 365 days Consumption
  36. 36. The “remaining difference” arising between the difference in consumption expenditure and value of supply (sum of production from factories for domestic consumption, registered micro-enterprises and imports) was attributed to the following items: (b) Sale of domestically produced counterfeited (either deceptive or non-deceptive) goods. This “remaining difference” consumption expenditure for the sector. The above mentioned grey market percentages have been calculated on the basis of annual consumption and supply amounts between the two survey periods. industry associations. The overall size was then validated using independent secondary sources wherever necessary. Actual industry size amounts for 2012 has been extracted from relevant industry associations. The estimated loss of sales to industry was taken as the grey market portion of the size of the industry. Duty, Customs (including Countervailing Duty) and Value Added Tax (VAT). The central excise and state tariffs (in case of alcohol) FICCI CASCADE members. 108 http://www.cbec.gov.in/excise/cxt2012-13/cxt_1213-idx.htm last accessed on August 22, 2012 Grey Market Percentage (by sector)= Industry Size Estimate for 2012 = Estimated Loss of Sales to Industry Revenue Loss to Government = Indirect Tax Loss to Government = Grey Market (%age) = Total Consumption — Total Supply X 100 Total Consumption
  37. 37. of revenue loss was not covered in this study. sectors. generated by the legitimate manufacturers if the demand-supply gap was met by them. income tax slab rate applicable which is 33% under Income Tax the following approach. make an initial estimate of the possible grey market that may exist in these two sectors. A summary of this limited analysis is provided in the section on other sectors and the initial estimates for these sectors have been included in the overall assessment of the size of grey market. However, a detailed study needs to be undertaken for these sectors to better understand them. Limitations to the Study The study believes that grey market activities are essentially illegal analyse and estimate. There is no global standard or established method of analysing or correctly evaluating such activities. The study aims to set forth estimates of grey market in selected sectors based on the detailed methodology explained in the report. However more in-depth research is needed in each of the sectors, since certain products have been taken on sample basis; other sectors across the Indian economy need similar analysis to build upon this baseline study. data has been compiled from three sources: ASI, registered MSMEs and import data; however reconciliation of these data sources with other government data is beyond the scope of this research. The study uses certain assumptions at various stages of data analytic iterations which have been vetted and endorsed by eminent economists and reputed industry associations. Any variation in assumptions and their interpretations may impact the results a more complete picture of the overall grey market. NSSO data has a larger composition of rural houseolds and hence additional Despite these limitations the value of results of data analytics and interpretations should not be underestimated. 109 http://www.incometaxindia.gov.in/home.asp last accessed on August 24, 2012 1 Amtek India Limited 2 Bharat Forge India Limited 3 Britannia Industries Limited 4 Colgate Palmolive India Limited 5 Dabur India Limited 6 Denso India Limited 7 Dynamatic Technologies Limited 8 Exide India Limited 9 Gillette India Limited 10 Glaxosmithkline Pharmaceuticals Limited 11 Godrej Consumer Products Limited 12 HCL Infosystems Limited 13 Hindustan Unilever Limited 14 ITC Limited 15 Marico Industries Limited 16 Motherson Sumi India Limited 18 Procter and Gamble Hygiene and Health Care Limited 19 Spice Mobiles Limited 20 Tata Tea Limited Table 5: List of companies whose annual reports were analysed Direct Tax Loss to Government = Income Tax Rate
  38. 38. Auto Components Alcohol Fast Moving Consumer Goods (Personal Goods) Mobiles Phones Computer Hardware Fast Moving Goods (Packaged Foods) Tobacco This section gives insights into the level and extent of counterfeiting, smuggling and tax evasions along the selected industry sectors on the basis of approach as discussed in the preceding sections. It also details out the methodology adopted for computation of grey market for each of the seven selected industry sectors. References of secondary data sources have been provided wherever used. Following sectors have been covered in this: Industry Sector Structure Industry Facts Objectives Overview Research Methodology – Consumption – Supply Grey Market Percentage Estimating Loss to Industry Validation – Industry Validation – Data Validation Prior Research Propositions
  39. 39. The grey market in the automobile sector exist mainly in the after-sales market. packaging closely imitates original products in many cases. Most customers seem unaware that grey market products may compromise safety or adversely impact the functioning of critical components and sub-assemblies or reduce the life of other components of the vehicle due to which counterfeit Industry or associations report that in some cases where the original manufacturers have sub-contracted production of Components, parts and accessories used in the repair of passenger and commercial vehicles are counterfeited adopting Objectives This study aims to ascertain the grey market percentage in automobiles sector using the total supply and demand amounts pan on account of grey market transactions. Overview The Indian automotive industry occupies a prominent place in the Indian economy. Due to its deep forward and backward linkages with several key segments of the economy, the automotive industry has a strong multiplier effect and acts as one of the most critical maturity of Indian original equipment manufacturers (OEMs). The original manufacturer segment is relatively safe from counterfeits, as their products are directly supplied to vehicle manufacturers. 111 of motor vehicles and sometimes for the original manufacture in the automobiles sector. The duplicates may be used in the aftersales market because of cost considerations, visual similarity and consumer preferences. In case the original manufactures 112 In the spare-parts industries, counterfeits are part of the overall problem of unapproved spare parts. They are traded on the grey separate the illegal items from the legal.113 The copying of trademarks constitutes the greatest proportion of intellectual property rights infringements in the automotive sector likely to be effected are those on vehicles that have been on the market for at least three or four years (in order to maximise the margins for counterfeiters. 110 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India 111 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, By Automotive Component Manufactures Association of India 112 Economic Impact of Counterfeiting and Piracy, by OECD 2008 113 Economic Impact of Counterfeiting and Piracy, OECD, 2008 114 Economic Impact of Counterfeiting and Piracy, by OECD 2008 Auto Components Industry Facts
  40. 40. On the consumer side, the market for counterfeits is worldwide because of penetration and growing homogeneity of motor vehicles, Rapid advances in technology, liberalization of the Indian economy and the booming market for automotive vehicles and components has in a way facilitated the counterfeiters in making money at the cost of the society.116 Various factors impacting the increased availability of counterfeit parts are: Any counterfeit may adversely impact the functioning and critical safety devices of the vehicle causing life threatening accidents. attributed to use of counterfeit parts. The cost of counterfeiting falls predominantly on the aftermarket parts manufacturers. Counterfeiting prevents manufacturers from expanding into new markets and there are incremental costs involved in investigating suspicious companies and the ensuing can pose. It’s important to realize that a zipper not working correctly on a fake purse is a lot different than brakes not working on counterfeit is its price. 121 Thus the automobile components’ market is more susceptible to production and sale of illegitimate products. Customers of fast moving components and consumables in the after-sales market, especially face a higher risk of grey market operations. The data sources used and approach to analysis for estimating the grey market in auto components sector are provided below. Research Methodology supply as per the formula given below: . 115 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 116 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India 117 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India 118 Economic Impact of Counterfeiting and Piracy, by OECD 2008 119 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India 120 Counterfeit Auto Parts: A Growing Industry Epidemic, available at http://www.autoinc.org/archives/2007/april2007/mech.htm 121 http://cormorantindia.com/automotive.html Total Consumption = Annual Consumption Expenditure derived from NSSO for last 365 days Consumption Grey Market (%age) = Total Consumption — Total Supply X 100 Total Consumption
  41. 41. The value of consumption in automobiles after market sector encompasses the cost of maintenance of both personal and commercial vehicles. The cost of repair and maintenance of personal vehicles such as motor cycle, car, scooter, jeep and other personal transport The value of consumption as per NSS included both the cost of components as well as service charges paid. As per Automotive 122 Hence we Further certain spares are also consumed by Commercial Vehicle (CV) segment which is not covered under NSS. According to reports from ICRA123 Financial statement analysis of dealers and of the vehicle manufacturers has been also done to compare the costs of services of commercial vehicles and personal vehicles. 122 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India 123 http://www.icra.in/Files/ticker/Auto&Auto-Note-June-2011.pdf 124 http://www.imaginmor.com/automobileindustryindia.html Figure 5: Household Consumption expenditure on Auto components- Spares & Parts Figure 6: Total Consumption Expenditure on Auto components- Spares & Parts 20% 80% Personal vehicle Commercial vehicle Total Consumption Expenditure
  42. 42. expenditure on components and spares on personal and commercial vehicles in the country. aftermarket and are prone to counterfeiting/ smuggling/ tax evasion. The ASI codes do not distinguish between components produced for original manufacturers and aftermarket. Hence the total expenses as extracted under the above codes will have to be further dissected to determine the value of components going into repairs and maintenance in automobiles segment. manufacturers. of their production is for after-market .126 . Hence, 125 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India 126 http://www.business-standard.com/india/news/auto-parts-makers-inbind-over-passingexcise-hike/469825/ last accessed on August 21, 2012 127 http://www.icra.in/Files/ticker/Indian%20Auto%20Components.pdf last accessed on August 21, 2012 Table 6: ASI Supply Codes- Auto Components Codes Codes Description linings, Conveyor, Filter etc. Spares Shock absorbers Filter, coils, spark plug Other Auto parts Supply Total Supply = Gross Sales Value as per ASI+ Import Value of goods imported + Annual Production Amounts of MSME
  43. 43. used in after markets as per ASI data. The value of total domestically produced sample components considered is estimated at After ascertaining the value of domestically produced goods the study determines the value of goods imported for the auto segment. e current sector. sales market. The value of imports has been supplemented with the auto components that are produced by enterprises falling in micro and small enterprises which are not covered in the ASI data. For this purpose annual production by registered micro and small enterprises in manufacturing segment under the production of codes pertaining to rubber and plastic components and electrical machinery and apparatus has been calculated. Here we have presumed that these micro and small enterprises would be only supplying to the aftermarket on account of their scale of operations. 128 This is the same percentage as used for ASI data 129 Automotive Mission Plan 2006-2016 Government of India, projecting the segment to reach 10.40% by 2016 and 7.20% by 2010. Hence 8% has been taken for this study. 130 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India Figure 7: Domestic Production for aftermarket Auto Components as per ASI Total Domestic Production for After Market
  44. 44. The value of total supply of sample auto components for aftermarket domestically produced by factories, micro and small enterprises crores. Figure 8: Auto component supply for After Market Grey Market (%age) = Total Consumption — Total Supply X 100 Total Consumption Figure 9: Auto Components Consumption Supply Gap 2010 Auto component supply for After Market
  45. 45. Estimating loss to industry 131 annual growth estimates of ACMA132 Hence applying the formula. This study estimates a grey market of 29.6% resulting in sales loss of Rs. 9,198 crores to the industry. Validation Industry Validation Our study considered extensive inputs provided to us by ACMA. Further, we met Society of Indian Automobile Manufacturers and key takeaways from this discussion were: account of evasion of taxes, using raw materials of inferior quality, costs of testing the product and lower overhead costs. of fake components not adhering to pollution standards and consequent increase in fuel consumption and in rate of accidents investigative agencies, reducing tax and duty rates. As per ACMA white paper on counterfeiting, the size of auto market, extent of counterfeiting and its impact has been summarised as under:133 131 ibid 132 http://acmainfo.com/docmgr/status_of_auto_industry/status_indian_auto_industry.pdf, http://www.acmainfo.com/pdf/Industry- Statistics_23092011.pdf, www.acmainfo.com/.../ACMA_annual_performance_2782011.ppt 133 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, By Automotive Component Manufactures Association of India Estimated Loss of Sales to Industry Industry Size Estimate for 2012 = Estimated Loss of Sales to Industry Table 7: ACMA Report Findings Financial Year 2010 Value (Rs Billion) Share of Aftermarket 25% Share of counterfeit components 35% Excise Duty 10% Other taxes 15%
  46. 46. Data Validation The grey market percentage for 2007-2008 was found to be 27.2% which is close to the estimates of 29.6% for 2009-2010. Figure 10: Auto Component Consumption Supply Gap 2008 Figure 11: Data Validation Auto Components
  47. 47. and operations of the grey market. Two such reports, ACMA and OECD , have highlighted the following matters: ACMA assembled vehicles but also components used or intended for use in vehicles. the offenders. Current laws do not provide for ‘suo moto’ action by government or government agencies. The states should be accorded a proactive role and a ‘suo motto’ authority to monitor, initiate prosecution for offences in connection with the manufacture, packaging, sale, stocking, distribution etc., of spurious auto components under authoritative machinery/ state level enforcement machinery established by the Motor Vehicles Act. These offences should be considered as cognizable and non-bail able and summary trial should be conducted for such offences. Trade should compulsory disclose source of procurement/supply of auto components. OECD The automotive sector should try to reduce their own costs of production and counter the advantages held by the The automotive sector’s should create an awareness of the problems associated with counterfeiting both within their recognise counterfeited parts. combating counterfeiting in legitimate supply lines but cost is the consideration. possible fakes. External investigators are widely used to detect infringements, which are then referred to the appropriate authorities in order to prevent further instances. Co-operation with customs and other law enforcement authorities, as well as actively pursuing private legal action against counterfeiters, are seen as key strategies by the automotive sector. incidence of counterfeiting and demand for such items. 134 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India 135 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012
  48. 48. Alcohol products are counterfeited because of superior recoverable brand value, price premium, high tax and excise seller that the product is genuine (deceptive), or they may consume for reasons of status, to drink and to offer to their friends a product which they suspect may be dubious (non-deceptive) but comes with the right brand image. The production of alcohol under non-standard conditions can be harmful and even life threatening. Reliable data on alcohol consumption and various alcohol related problems are not readily available in India. Objectives This study aims to ascertain the grey market percentage in alcohol sector using the total supply and demand amounts pan India account of grey market transactions. Overview advertisement of alcohol products so as to reduce the alcohol consumption. Several entry barriers exist for new companies and new brands in alcohol industry. These include the ban on liquor ads, limited of changes in raw material prices. The sector also faces progressive taxation, which dissuades price hikes, as it attracts higher taxes.136 The industry faces the twin problem of production of alcohol under non-standard conditions which are much more harmful than the original alcohol, at times life threatening and smuggling/ illicit trade of cheaper products that do not attract import/ excise duties. counterfeit alcohol, masquerading as the mainstream brand may have been convinced by the seller that the product is genuine. Or they may consume for reasons of status, to drink and to offer to their friends a product which they suspect may be dubious but comes with the right brand image. Alcohol products are counterfeited because of superior recoverable brand value, price premium, high tax and excise component of with inferior substitutes. 136 India Consumer – Alcoholic Beverages, available at rathihttp://www.rathi.com/ResearchUpload/634759591380781250_India%20 Consumer%20-%20Alcoholic%20Beverages%20-%20Holding%20the%20fort.pdf last accessed on August 17, 2012 137 http://www.indianalcoholpolicy.org/images/alcohol_atlas/F-Current%20Patterns%20and%20Trends.pdf last accessed on August 8, 2012 138 Alcohol and Emerging Markets (Patterns, Problems and Responses) available at http://books.google.co.in/books?id=CVgyRxZhi3oC&pg=P iULW7ENHyrQfM6oC4AQ&ved=0CE8Q6AEwAg#v=onepage&q=alcohol%20counterfeiting%20india&f=false last accessed on August 8, 2012, published by International Center for Alcohol policies 139 Economic Impact of Counterfeiting and Piracy, OECD, 2008 Alcohol Industry Facts
  49. 49. The substitution of alcohol can be carried out as small scale cottage industries but there is increasing evidence of large scale operations that include the use of semi-automated bottling lines, sophisticated printing machines, bottle moulds, production of packaging and the production of raw spirit. Consumers generally do not knowingly buy counterfeit alcohol. Counterfeiting occurs through the counterfeiter misrepresenting the quality of the product contents or its origins. It can take the form of tipping (genuine containers supplemented with alcohol from non- Thus alcohol products are produced illicitly because of superior recoverable brand value, price premium, high tax and excise for estimating the grey market in alcohol sector are provided below. Research Methodology supply as per the under mentioned formula. The value of consumption in alcohol sector encompasses the consumer expenditure on liquor whether Indian or foreign and beer. Consumption has been considered for country liquor (332), multiplied by 12 to obtain the annual consumption expenditure on alcohol. Household consumption expenditure on alcohol in India has been displayed pictorially code wise in Figure 12. According to a study made by National Institute of Mental Health and Neurosciences (NIMHANS), alcohol use attracts social opprobrium and alcohol use for the majority is still stigmatized. This has created an ‘ambivalent’ drinking culture and the beverages and tax evaded products. 140 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012 142 http://www.nimhans.kar.nic.in/deaddiction/CAM/ADD_alc_india_-public_health.PDF last accessed on August 28,2012 143 http://www.indianalcoholpolicy.org/images/alcohol_atlas/F-Current%20Patterns%20and%20Trends.pdf last accessed on August 28,2012 Figure 12: Household Consumption expenditure on Alcohol as per NSS Total Consumption = Annual Consumption Expenditure derived from NSSO for last 365 days Consumption Grey Market (%age) = Total Consumption — Total Supply X 100 Total Consumption Total Alcohol Consumption
  50. 50. account for the ambivalent or undocumented liquor consumption. Hence total consumption expenditure on sample alcohol codes codes have been closely analysed to identify those pertaining to the edible and consumable category of liquor and are prone to counterfeiting/ smuggling/ tax evasion. ASI data for alcohol has been considered under the product category of beer, wine, alcohol and liquor. For our analysis we have Figure 13: Total Alcohol Consumption Figure 14: Domestic Production for Alcohol as per ASI Supply = Gross Sales Value as per ASI+ Import Value of goods imported + Annual Production Amounts of MSME Total Supply
  51. 51. After ascertaining the value of domestically produced goods the study determines the value of goods imported for the alcohol MSME enterprises. The value of total supply of sample alcohol categories which is domestically produced by factories, micro and small enterprises and crores. Figure 16: Alcohol Consumption Supply Gap 2010 Figure 15: Total Supply - Alcohol Grey Market (%age) = Total Consumption — Total Supply X 100 Total Consumption Rs
  52. 52. Estimating loss to industry of grey market. Applying the formula. The loss to industry on account of grey market operations for 2012 is estimated at Rs. 5,626 crores. Validation has given us insights into the level of grey market operations in alcohol industry and the main products under the illicit trade. Key takeaways were: high levels of counterfeiting. alcoholic beverages covering full range of higher value alcoholic drinks. The samples should be tested for their legitimacy by consumer survey to assess importance of distribution channels and correctly portray the consumption pattern. Excise/ Import duty on alcohol is both an important source of government revenue and a means of controlling and limiting consumption. Hence alcohol excise stamps, holograms can be used as an effective tool by tax collecting authorities for product 144 http://news.fullhyderabad.com/hyderabad-news/liquor-consumption-in-india-to-cross-19-000-million-litres-assocham-5480.html last accessed on August 28, 2012 145 http://www.indianexpress.com/news/indian-alcohol-mkt-seen-at-rs-1-75-950-cr/733670/0 last accessed on August 28, 2012 Estimated Loss of Sales to Industry Industry Size Estimate for 2012 = Estimated Loss of Sales to Industry
  53. 53. Delhi government to increase the excise collection and check the supply of the illicit alcohol in the state. The problem of illicit and spurious alcohol consumption can also be solved by using a vehicular ad hoc sensor network, moving net to detect their production by detecting methanol content or diazepam in a wide geographical area on the public transport system especially in areas more prone to such illicit production. 147 148 [1] A public transport system based sensor network for fake alcohol detection, By Maneesha V Ramesh, Riji N Das available at http://resourc- es.metapress.com/pdf-preview.axd?code=t3x4727p40601rtk&size=largest

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