Socio economic impact of counterfeiting smuggling and tax evasion in seven key sectors india

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Invisible enemy!

Socio-Economic Impact of Counterfeiting, Smuggling and Tax Evasion

in Seven Key Indian Industry Sectors

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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:[email protected]@tari.co.in

Address:Thought Arbitrage Research InstituteC-16, Qutab Institutional Area,

www.tari.co.in

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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 India6.

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 India16.

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

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


Validation

Computer Hardware

Industry Facts

Objectives

Overview


Estimating loss to industry

Validation

61

Industry Facts 61

Objectives 61

Overview 61

Research Methodology 62


Validation 66

Industry Facts

Objectives

Overview



Validation

Industry Facts

Objectives

Overview



Validation

Tobacco

Industry Facts

Objectives

Overview



Validation

6

Social Impact

11.

12. AnnexuresAnnexure I: Key Milestones

133

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

Editor‘s Noteand 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

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, 20082 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

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

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

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, research and development tends to decline on account of vulnerability to counterfeits and fakes. The counterfeiter-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.

Total Annual Sales

Sectors studied

Auto Components

Alcohol


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


Mobiles Phones

Computer Hardware


Tobacco

*value in Rs Crores

Grey Market (percentage in each sector)

(Calculations are for the year 2012)

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

Info

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c/ G

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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, 20125 Economic Impact of Counterfeiting and Piracy, OECD, 2008

1. Introduction

Grey Market = Counterfeiting + Smuggling + Tax Evaded Goods

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, 20088 Economic Impact of Counterfeiting and Piracy, OECD, 20089 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 201110 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%2FData%2FDocuments%2FBascap%2FGlobal-Impacts-Study---Full-Report%2F&ei=TuVFUObHB4jyrQeivYHwCg&usg=AFQjCNFGG_R7qa1yO8th-bE42bAXud42HJA last accessed on September 4, 201211 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, 200813 The Customs Act 1962, available at www.cbec.gov.in/customs/cs-act/custom-act-1962.pdf, last accessed on August 31, 2012

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

TaxesState

GovernmentTaxes

CustomsDuty(Tax on

import)

Central Excise

Duty ( Tax OnManufacture)*

Central SalesTax

State ValueAdded 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

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, 201218 http://www.cainindia.org/news/8_2012/interstate_racket_of_tax_evasion_busted.html last accessed on November 9, 201219 http://news.outlookindia.com/items.aspx?artid=765903 last accessed on November 9, 2012

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, 201021 http://www.gao.gov/assets/310/303062.html last accessed on September 4, 201222 Economic Impact of Counterfeiting and Piracy, OECD, 200823 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011

25 last accessed on September 3, 201226 last accessed on September 3, 2012

Research

Methodology

Demand

Size

Estimation

Sample

Questionaire

Consumer/

Member

Survey

Supply

Size

Estimate

Search &

Seizure Data

Mystery

Shopping

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 ContextAdopting 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, 201228 last accessed on September 3, 201229 last accessed on September 3, 201230 last accessed on September 3, 201231 last accessed on September 3, 201232 last accessed on September 3, 201233 last accessed on September 3, 201234 Counterfeit Pharmaceuticals – Update on Current Status and Future projections available at ,

last accessed on September 18, 2012

22

validation supplementnot 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

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, 200838 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201239 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 counterfeiterNew techniques enable the faking of high tech products

Emerging Markets

Free Markets growthEnforcement agencies or institutions not growing commensurately

Increased International Trade

International trade including trade in counterfeited goods has increased substantiallyResource constraint with customs authorities of most countries leading to reduced surveillance

Emerging Products

Share of manufactured and processed products increasing in international tradeManufacturing almost 75% of world trade

Factors Contributing Towards

Counterfeiting

Figure 2: Factors contributing towards Counterfeiting/Smuggling/Tax Evaded Good

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, 201241 global Financial Integrity available at last accessed on September 18, 201242 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo-ber 22, 201243 Global counterfeiting, Background document available at http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last accessed on April 14, 201244 Economic Impact of Counterfeiting and Piracy, OECD, 200845 Economic Impact of Counterfeiting and Piracy, OECD, 200846 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

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, 201249 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, 201250 http://elsa.berkeley.edu/~saez/course/Slemrod,Yitzhaki%20PE%20Handbook%20chapter.pdf last accessed on November 16, 201251 last accessed on November 14, 201252 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

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, 201255 Clotfelter, C. 1983. Tax evasion and tax rates: An analysis of individual returns. Review of Economics and Statistics56 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

Operations

Government EconomyOriginal RightHolder

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, 201159 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.

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, 201261 European commission impact of counterfeiting available at -toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 201262 Economic Impact of Counterfeiting and Piracy, OECD, 200863 Economic Impact of Counterfeiting and Piracy, OECD, 200864 Global counterfeiting, Background document available at http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last accessed on April 14, 201265 Economic Impact of Counterfeiting and Piracy, OECD, 200866 Final report for the European Commission Directorate-General Single Market 15 July 2002, Centre for Economic and Business Research67 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201268 NBER Working paper series, Foreign Counterfeiting of status goods, Available at SSRN: http://ssrn.com/abstract=344754

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 Brown70 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201271 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, 201273 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201274 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201275 last accessed on September 3, 201276 Economic Impact of Counterfeiting and Piracy, OECD, 200877 last accessed on March 13, 201278 European commission impact of counterfeiting available at -toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 2012

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, 201281 European commission impact of counterfeiting available at -toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 201282 Economic Impact of Counterfeiting and Piracy, OECD, 200883 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo-ber 22, 201284 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.pdf86 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, 201287 European commission impact of counterfeiting available at -toms_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 201288 Economic Impact of Counterfeiting and Piracy, OECD, 200889 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201290 International Anti Counterfeiting Coalition (IACC) White91 last accessed on September 3, 201292 Economic Impact of Counterfeiting and Piracy, OECD, 2008

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, 201294 European commission impact of counterfeiting available at customs_handbook/2_impact_on_counterfeiting_and_piracy.pdf last accessed on October 22, 201295 Counterfeit Goods and the Public’s Health and Safety, International Intellectual Property Institute, at www.iipi.org96 Counterfeit Goods and the Public’s Health and Safety, International Intellectual Property Institute, at www.iipi.org97 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf last accessed on Octo-ber 22, 201298 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*

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.

OECDdomestically 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.

GAOof 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 2008100 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP report, February 2011101 International Anti Counterfeiting Coalition (IACC) White Paper102 Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods, By GAO, April 2010103 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

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, 2008105 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011106 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011

Auto Components

Alcohol


Mobiles Phones

Computer Hardware


Tobacco

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. ValidationExpert MeetingsIndustry Association Meetings, InputsData Substantiation

2B. Impact Analysis

Industry Sector

Government

Social Impact

Figure 4. Overall Approach

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.

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.

SupplyTotal 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

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 100Total Consumption

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 Limited2 Bharat Forge India Limited3 Britannia Industries Limited4 Colgate Palmolive India Limited5 Dabur India Limited6 Denso India Limited7 Dynamatic Technologies Limited8 Exide India Limited9 Gillette India Limited10 Glaxosmithkline Pharmaceuticals

Limited11 Godrej Consumer Products Limited12 HCL Infosystems Limited13 Hindustan Unilever Limited14 ITC Limited15 Marico Industries Limited16 Motherson Sumi India Limited

18 Procter and Gamble Hygiene and Health Care Limited

19 Spice Mobiles Limited20 Tata Tea Limited

Table 5: List of companies whose annual reports were analysed

Direct Tax Loss to Government = Income Tax Rate

Auto Components

Alcohol


Mobiles Phones

Computer Hardware


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

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

ObjectivesThis 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 India111 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, By Automotive Component Manufactures Association of India112 Economic Impact of Counterfeiting and Piracy, by OECD 2008113 Economic Impact of Counterfeiting and Piracy, OECD, 2008114 Economic Impact of Counterfeiting and Piracy, by OECD 2008

Auto Components

Industry Facts

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 fromexpanding 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.


supply as per the formula given below:

.

115 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012116 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India117 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India118 Economic Impact of Counterfeiting and Piracy, by OECD 2008119 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, Automotive Component Manufactures Association of India120 Counterfeit Auto Parts: A Growing Industry Epidemic, available at http://www.autoinc.org/archives/2007/april2007/mech.htm121 http://cormorantindia.com/automotive.html


Consumption


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 India123 http://www.icra.in/Files/ticker/Auto&Auto-Note-June-2011.pdf124 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

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 India126 http://www.business-standard.com/india/news/auto-parts-makers-inbind-over-passingexcise-hike/469825/ last accessed on August 21, 2012127 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.SparesShock 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

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 data129 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

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


Figure 9: Auto Components Consumption Supply Gap 2010

Auto component supply for After Market


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 ibid132 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.ppt133 Indian Automotive Aftermarket Study Book 2011 & White Paper on Legislative Improvements to combat counterfeiting, By Automotive Component Manufactures Association of India




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%

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

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 India135 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

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.

ObjectivesThis 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%20Consumer%20-%20Alcoholic%20Beverages%20-%20Holding%20the%20fort.pdf last accessed on August 17, 2012137 http://www.indianalcoholpolicy.org/images/alcohol_atlas/F-Current%20Patterns%20and%20Trends.pdf last accessed on August 8, 2012138 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 policies139 Economic Impact of Counterfeiting and Piracy, OECD, 2008

AlcoholIndustry Facts

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.


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.


142 http://www.nimhans.kar.nic.in/deaddiction/CAM/ADD_alc_india_-public_health.PDF last accessed on August 28,2012143 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


Consumption


Total Alcohol Consumption

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

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


Rs


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, 2012145 http://www.indianexpress.com/news/indian-alcohol-mkt-seen-at-rs-1-75-950-cr/733670/0 last accessed on August 28, 2012




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

Computer hardware is one of the fastest growing industry sectors around the world.

and social transaction, accessibility to computing resources is increasingly becoming essential for the masses. At the same time affordability and low awareness of effects of using counterfeit products is a challenge. There are instances of rebranding, refurbishing an original product at the end of their life cycle to either sell as a new product (deceptive) or as non-deceptive counterfeits or pass-offs.

rebranding and refurbishing end of life products to sell them as originals.

market operations.

ObjectivesThis study aims to ascertain the grey market percentage in computer hardware sector using the total supply and demand amounts

industry on account a grey market transactions.

Overview

Computer hardware is one of the fastest growing industry sectors around the world. IT hardware market in India continue to expand

supercomputers, data processing equipment, printers, digitizers, networking products, such as modems, hubs, add-on cards etc. The related peripherals market including networking products in India is growing at a rapid pace and fast assuming global scales, mainly due to the setting up of assembly units in India by MNCs.

Computers and their peripherals have complicated inner workings; nevertheless, desktop, laptop and other systems are highly prone to counterfeiting and piracy. Electrolytes made from a stolen or defective formula used on computer motherboards can cause the components to leak or burst, catapulting into failure of the entire system.

systems to fail or be vulnerable to virus attacks/ security violations and can jeopardize national security (in case of spyware). There

The growing use of counterfeit IT hardware and computer equipment is one of the most challenging issues facing businesses across

suppliers, and manufacturers.

For these legitimate companies, the losses are huge and more damaging because counterfeit IT hardware competes with authentic hardware, and in a way affects a brand’s authenticity and market place equity.

Counterfeit IT hardware containing maliciously designed microprocessors and computer chips may cause serious security threats. Such problems may be created either by a hostile nation or a domestic terrorist or criminal. Counterfeit IT hardware is also found to be used in ships and warplanes apart from communication networks.

Counterfeit IT hardware poses grave concerns to a country’s national security as the false equipment can cause systems to fail and

149 http://commerce.nic.in/eidb/default.asp last accessed on August 26, 2012

151 http://www.powersourceonline.com/magazine/2009/11/counterfeit-it-hardware, last accessed on March 20,2012

Computer HardwareIndustry Facts

of counterfeit IT hardware is considered to be the most severe kind of cyber warfare.

sometimes lead to security threats to the government and defense establishments.

Computer hardware and components are counterfeited by packaging poor quality equipment as branded or selling productions overruns with consumers buying them unknowingly.

Criminal factions and terrorist groups are suspected of exploiting counterfeiting to fund their criminal enterprises or to make quick

A number of factors have coalesced to create a business environment in which manufacturing counterfeit IT goods is not only lucrative, but also much more attainable than ever before. Counterfeiters are becoming increasingly knowledgeable about technological products, and their increased ability to obtain more advanced manufacturing machinery has been one of the most crucial factors in fuelling the production of illegal high-tech goods. Secondly, Information Technology products yield a much higher

consumers may willingly spend thousands of dollars on counterfeit laptop computers.

A third contributing factor is the popularity of e-commerce. Many counterfeiters are using the Internet to reach potential buyers,

end up on the grey market were once surplus stock “dumped” by third-party manufacturers and distributors without the OEM’s knowledge.

brought forth the

Criminal factions and terrorist groups are suspected of exploiting counterfeiting to fund their criminal enterprises or to make

through counterfeit IT hardware like Cisco routers and switches that were installed in government networks.

methods such as pre-infecting software and computer parts.

retail outlets. This includes desktops, laptops, their components and computer peripherals.

The data sources used and approach to analysis for estimating the grey market in computer hardware sector are provided below.


supply as per the formula mentioned below.

152 http://www.powersourceonline.com/magazine/2009/11/counterfeit-it-hardware, last accessed on March 20,2012153 http://www.powersourceonline.com/magazine/2009/11/counterfeit-it-hardware, last accessed on March 20,2012

155 http://www.powersourceonline.com/magazine/2009/11/counterfeit-it-hardware, last accessed on March 20,2012156 http://www.bizforum.org/whitepapers/newmomentum.htm last accessed on October 29, 2012157 http://www.bizforum.org/whitepapers/newmomentum.htm last accessed on October 29, 2012158 http://www.kpmg.de/docs/20050713_IT_CounterfeitWhitePaper_en_fertig.pdf last accessed on October 29, 2012159 http://www.bizforum.org/whitepapers/newmomentum.htm last accessed on October 29, 2012


The value of consumption in computer segment encompasses both computers and their peripherals purchased for household consumption and those used in corporates, industries, other businesses, government, government agencies etc. The value of

and are prone to counterfeiting/ smuggling/ tax evasion.

personal computer and its components like peripherals, hard disk drive, ink cartridges, key board, computer power supply system,

It may be mentioned here, that a primary survey of sample retail outlets revealed that a sizeable amount of components are sold by retailers to the assemblers of unbranded personal computers, small repairing (second-hand) units and individual support technicians working in the after-sales market of branded products.

On the basis of our discussions with industry experts and our primary research of retail outlets and secondary sources, we have

Component sales are generally evenly distributed between retail and institutional markets. Notebooks and laptops produced locally

Household consumption of Rs. 4,834 crores

estimated as per NSS

InsitutionalConsumptioncould not beascertained

Total Computer Hardware Consumption

Table 8: ASI Supply Codes List

Code Description

Motherboard


Consumption



are mostly sold in the retail market.

Hence the value of codes extracted has been discounted to demarcate the value of computer hardware sold to household and

Therefore, as per ASI the value of domestically produced sample computer hardware for the household segment is estimated at

After ascertaining the value of domestically produced goods the study determines the value of goods imported for the computer

household segment.

supplies from registered micro enterprises to this market. The value of total supply of computer hardware domestically produced

Figure 17: Domestic Production for Computer hardware for household as per ASI

Figure 18: Computer hardware Supply for Household Consumption

*Other computer conponents consists of peripherals, power supply system, hard disc, ink cartridges, keyboards, memory, monitor, mouse, operating System, printer, UPS etc.


Department of Electronics and Information Technology 161 As both these data were

Applying the formula.

This study estimates a grey market of 26.4% resulting in a sales loss of Rs 4,725 crores to the industry.

on August 26, 2012161 http://commerce.nic.in/eidb/default.asp last accessed on August 26, 2012

Figure 19: Computer Hardware Consumption Supply Gap 2010





Validation

As part of industry validation we have had intensive discussions and interviews with senior professionals in the computer hardware

sample retail outlets.

As problems with counterfeit IT hardware continue, industry members must join forces to create a stronghold by regular interactions. A regular interaction by the companies with their vendors on sharing their experiences and ensuring best practices will help to curb grey market operations in the secondary computer hard ware market. The companies must publicise their efforts taken to curb counterfeiting to industry members/ associations, consumers and the general public.162

Consumer awareness is the key whereby they need to be empowered with regular campaigns to differentiate between an original and fake hardware product along with ill effects of usage of cheaper alternatives. The original manufacturers should continuously enhance and update their technologies to detect any illegitimate component in their IT systems.163

steps in anticipation of the malicious penetration to the computer networks.

Thus computer hardware industry is beleaguered with deceitful parts and peripherals which pose an irrevocable challenge to the brand of original manufacturers in addition to the threat of spy ware getting installed in various computer installations.

162 Downloaded from http://www.powersourceonline.com/magazine/2009/11/counterfeit-it-hardware, last accessed on March 20,2012

164 Downloaded from http://www.powersourceonline.com/magazine/2009/11/counterfeit-it-hardware, last accessed on March 20,2012

61

frequent intervals such as soap, detergents, cosmetics and other toiletries.

imitate the original product and replace them with cheap versions.This sector also faces threat of pass-offs implying products bearing a similar sounding name or similar spelling or packaging and designing where the consumers are misled into believing that they have purchased the original. In rural India, grey market is prevalent in pockets that either have low accessibility to the original manufacturers’ distribution

demand driven by advertisements broadcast in electronic media which now covers the entire country. Customers may buy deceptive or non-deceptive counterfeits because of non-availability of the original product as the retailer sells cheap products for higher margins.

pass-off products believed that they had purchased the original product.

ObjectivesThis study aims to ascertain the grey market percentage in fast moving consumer goods sector (personal care) using the total

sales caused to legitimate industry on account of grey market transactions.industry on account a grey market transactions.

The market is fragmented and a considerable part of the market comprises of unorganized players selling unbranded and unpackaged products.166

the per capita consumption of almost all products in the country is very low compared to world standards, which points to huge untapped opportunities.

products have a similar sounding name or have a similar spelling with similar looking design and packaging. These products are meant to mislead the consumers who are illiterate or are in a hurry to purchase goods.

of Indian population living in rural areas, certain pockets of rural areas having low accessibility to the original

manufacturer, the sector is prone to counterfeiting.

165 As per study available at iseindia.com, interconnected stock exchange of India http://www.iseindia.com/ResearchPDF/FMCG_Update1.pdf last accessed on August 28, 2012.166 As per study available at iseindia.com, interconnected stock exchange of India http://www.iseindia.com/ResearchPDF/FMCG_Update1.pdf last accessed on August 28, 2012.167 As per study available at iseindia.com, interconnected stock exchange of India http://www.iseindia.com/ResearchPDF/FMCG_Update1.pdf last accessed on August 28, 2012.168 http://vrittivaani.wordpress.com/2011/11/06/fake-brands-in-the-race-to-win-the-rural-markets-of-india/ last accessed on October 30, 2012169 As per Indian census 2011, 70% of Indian population lives in rural areas, www.censusindia.gov.in

Industry Facts

62

media. Consumers may buy the counterfeit because of non-availability of the original product or the retailer may deceive her by selling cheap products on high margins.

Counterfeit product may not deliver the promised value resulting in reputational loss and decreasing brand loyalty to the manufacturer in an industry where the product switching cost is negligible.

who bought pass off products believed that they had purchased the original product.

products are provided below.


supply as per the formula mentioned here.

The value of consumption in fast moving consumer goods includes expenditure on daily use items such as soaps, shampoos, tooth paste, tooth brush, shaving cream, perfumes etc.

The consumption expenditure as per NSS was considered for the codes mentioned here.

of these products, the cyclicality and seasonality of demand variations of demand. Multiple scenarios were built of multipliers of

knowledgecenter.pdf last accessed on August 8, 2012171 Obtained by taking ISE estimate 30% of FMCG spend is for personal care on a market size estimate by AC Nielsen of Rs. 146,300 crores

Table 9: NSS Consumption Codes FMCG (Personal goods)

Code Code Description

Toilet soap

Toothpaste, Toothbrush, Comb, etc.

Hair oil, Shampoo, Hair cream

Shaving cream, Aftershave lotion

Other Toilet articles


Consumption


63

following page.

analysed to identify those pertaining to personal care segment and are prone to counterfeiting/ smuggling/ tax evasion.

Table 10: ASI Supply Codes List FMCG (Personal Goods)

Code Code Description361362 Cold Cream, Face cream, Hair care

products, cosmetics, deodorants, cologne

363 Detergent cake, powder, paste, wash-ing soaps, shaving cream, bleaching/ whitening agents etc.Toothpaste, Toothbrush and powder

Figure 20: Household Consumption expenditure on FMCG Personal Goods



Note: FMCG goods consumed in hospitality and other service sectors have not been considered.

business to consumer purposes.

enterprises which are not covered in the ASI data. For this purpose annual production by registered micro and small enterprises

has been arrived following a conservative approach and after consulting industry experts, consultants in the SME sector and macro-economists.

Figure 22: FMCG Personal Goods

Figure 21: Domestic Production for FMCG (personal goods) as per ASI

crores.


A study

172 As per study available at iseindia.com, interconnected stock exchange of India http://www.iseindia.com/ResearchPDF/FMCG_Update1.pdf last accessed on August 28, 2012.173 http://www.equitymaster.com/research-it/sector-info/consprds/Consumer-Products-Sector-Analysis-Report.asp last accessed on August 25, 2012174 http://www.nielsen.com/in/en/news-insights/press-room/2012/demand-spotting--the-rise-of-the-indian-small-town.html last accessed on August 31, 2012

Figure 23: FMCG (Personal goods) Consumption Supply Gap 2010




66

Applying the formula

This study estimates a grey market of 25.9% resulting in a sales loss of of Rs 15,035 crores to the industry.

Validation

Data Validation

MSME data.

The grey market percentage for 2007-2008 was found to be 28.8% which is close to the estimates of 25.9% for 2009-2010.

Figure 25: Data Validation FMCG (Personal Goods)

Figure 24: FMCG (Personal Goods)


Prior Research Propositions

from market, industry consortiums, etc. The industry is countering counterfeits by investing in sophisticated packaging and educating the wholesalers. This might reduce the possibility of replicating the packaging, since counterfeiters are typically small scale manufacturers, who make spurious products in their backyard. However, a consumer who buys a fake product unknowingly would never know which one is fake and which one is real. A more credible solution is to empower the consumer herself to understand if a product is spurious.

175 http://www.activecubes.com/authentick.php last accessed on October 30, 2012

Counterfeiting in packaged food industry can be life threatening or can cause serious health ailments in the long run owing to consumption of non-standard or low quality edible food items. The counterfeit production is generally for local consumption on account of the weight and perishability of the underlying products. The consumer may not be able to distinguish between the original and counterfeit on account of deceptive packaging. Counterfeiting is more prevalent in case of food and drink products that requires lesser organized effort and relatively smaller investments on the part of the counterfeiters.

counterfeit. In cases of pass-offs, buyers may not realise the entire adverse implication of such purchases and might be discouraged from buying that brand again only through usage experience that too only if he/ she has used the original product.

Objectives

legitimate industry on account of grey market transactions.

Overview

have fuelled this sub-sector’s growth are the arrival of food multinationals; rising popularity of quick-service restaurants; modern retail trade; technological advancement; changing urban lifestyles.

Counterfeiting of food and drink encompasses the wholesale manufacture of products intended as imitations of genuine products and misrepresentation of inferior products as being of a higher quality. Consumers are mostly unaware of acquiring a counterfeit product. Misrepresentation of food and drink can take the form of use of branded packaging to pass-off non-branded, out-of-date or sub-standard merchandise, production of replica packaging and merchandise, and simple mislabelling.

features. The consumer may not be able to distinguish between the original and counterfeits on account of deceptive packaging prompting the original manufacturer to incur heavy investments in brand protection and packaging solutions.

Counterfeiting is more prevalent in case of food and drink products that can be copied (or at least substituted) with little organisational

in many cases those buyers might not even realise that they have purchased a counterfeit in place of the original item (but might be discouraged from buying that brand again).

processes and recipes, on account of availability of information in public domain, but treated them as trade secrets to be protected

Counterfeit food threats are becoming more common as supply chains become more global and as imaging and manufacturing technology become more accessible. A counterfeiter may indulge in one or all of the actions such as adulteration or product tampering or diversion or overruns or simulation or look-a-likes. The products are selected for counterfeiting because they are

176 http://www.fnbnews.com/article/detnews.asp?articleid=31817&SectionId=15, last accessed August 31, 2012

178 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012179 Economic Impact of Counterfeiting and Piracy, by OECD 2008

Industry Facts

pathogens, poison or harmful chemicals, inactive ingredients or preservatives and other environment issues.

greater vigilance from customs authorities thereby reducing the risk of discovery, or in case of discovery the quantities are relatively smaller.

detect the counterfeit on account of misleading packaging; hence health concern deterrent would not apply. In instances when counterfeits are detected, consumers (especially those with less disposable income) might be tempted to take a risk on the possible health problems associated with counterfeited products, if these are priced well below the genuine items.

The dominant effects of counterfeiting in this sector are: original producers have to invest considerable sums in brand protection,

and images to authenticate the original products).

and resources of industry are often diverted to devise methods and campaigns to protect their product reputation, monitoring of distribution channels, gathering market intelligence merely to devise deterrents and continuously strive to stay ahead of grey market operators in the packaging technology adoption curve.

The possible health effects of sub-standard counterfeited products reaching an unsuspecting market are substantial ranging from headaches to people dying from the consumption of such products. The possibility of serious health consequences would probably be too great for most consumers to take the risk. Therefore, counterfeiters do everything possible to make their counterfeited items appear as close to the original as possible.

As well as deceiving consumers through its appearance, there is also a risk that the more attention (and cost) that goes into the packaging, the less will be devoted to the product inside, thus increasing the possibility that the fake goods could carry health risks.

Food and drink producers face negative effects on sales, revenues, brand value and customer loyalty and potential regulatory and legal issues, if consumers become ill or die as a result of consuming counterfeited products, even if the producers of the original items are blameless. Hence counterfeiting cannot be considered as a soft crime.

consultation with FICCI CASCADE members and experts. The data sources used and approach to analysis for estimating the grey

Research Methodology Details

supply as per the formula mentioned here.

180 http://www.afdo.org/Resources/Documents/4-news-and-events/past-presentations/070619Food1600SpinkFinal.pdf Last accessed on October 12, 2012181 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012182 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012183 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012184 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012185 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012186 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012


Consumption


edible oils, confectionary etc. The consumption expenditure as per NSS was considered for the following codes:

From the analysis of above mentioned items, we found that they are sold both in packed and non-packed versions. Since this study

versions was very challenging.

The penetration of packaged food is still quite low in India and food products are mostly available in unpackaged form across

products.

Further the proportion of availability of packed and unpacked versions vary substantially between urban and rural India. NSS provides the consumption expenditure bifurcated into rural and urban expenditure.

coconut oil, groundnut oil, mustard oil, other edible oils, vanaspati and margarine, ghee, fruit juices and shakes, jam, jelly, pickles,

these categories to be in packaged form.

For estimating the packaged form of consumption in urban areas of these categories of food products, our opinion survey of industry

changing urban customer preferences. Another recent study showed urban consumption of packaged food to be nearly 3 times that in rural areas .

Consumption expenditure on other products which can be sold only in packaged condition has been determined without applying

187 about 10-12 per cent of output is processed and consumed in packaged form”, ISE study available at http://www.iseindia.com/ResearchPDF/FMCG_Update1.pdf last accessed August 31, 2012188 ASSOCHAM study shows rural packaged food consumption at 22% and urban at 78% (which is almost 3 times). Press release available at http://www.fnbnews.com/article/detnews.asp?articleid=31817&SectionId=15, last accessed August 31, 2012

Table 11: NSS Codes FMCG (Packaged Food)

Item code Item description

112 Sewai, noodles

113

161

162 Milk: condensed/ powder

Vanaspati, margarine

Mustard oil

Coconut oil

Edible oil: others

Tea : leaf

Coffee powder

Mineral water

Cold beverages: bottled/canned

Fruit juice and shake

Other beverages: cocoa, chocolate, etc.

Cake, pastry

Salted refreshments

Sauce

Jam, jelly (gm)

any factor.

The factors were applied on products sold in both packaged and unpackaged condition and thereafter packaged food consumption

and was also used in supply side computation.

These codes have been closely analysed to identify those pertaining to packaged food segment and are prone to counterfeiting/ smuggling/ tax evasion.

Figure 26: Household Consumption expenditure on FMCG packaged food

Figure 27: Domestic Production for FMCG (packaged foods) as per ASI

Table 12: ASI Supply Codes Packaged Food


122

123

132 Confectionary

133

Soft drinks, Edible drinks etc



Certain food items are sold in both packaged and non-packaged condition, requiring the study to search for percentage of goods

oil, fruit juice, ghee, jam, jelly, certain beverages, prepared sweets, salted refreshment, sewai, noodles, tea leaves etc. have been

sector.

enterprises which are not covered in the ASI data. For this purpose annual production by registered micro and small enterprises involved in manufacturing and pertains to the code of food and beverage has been considered. The production has been calculated using an approach similar to ASI production.

crores.

Figure 28: FMCG Packaged Food Supply

Figure 29: FMCG (Packaged Food) Consumption Supply Gap 2010

Rs

Using the formula.

consumption expenditure data.

yielded a size estimate which is close to our calculation of NSS consumption expenditure.

whereas ASSOCHAM has projected a growth rate

Applying the formula:


Validation

data.

189 As per study available at iseindia.com, interconnected stock exchange of India http://www.iseindia.com/ResearchPDF/FMCG_Update1.pdf last accessed on August 28, 2012.190 http://www.equitymaster.com/research-it/sector-info/consprds/Consumer-Products-Sector-Analysis-Report.asp last accessed on August 25, 2012191 http://www.fnbnews.com/article/detnews.asp?articleid=26706&sectionid=32 last accessed on August 29, 2012192 http://www.fnbnews.com/article/detnews.asp?articleid=31817&SectionId=15 last accessed on August 29, 2012





Figure 30: FMCG Packaged Food Consumption Supply Gap 2008

Figure 31: Data Validation FMCG Packaged Food

The manufacturers have a constant job of updating their product and packaging technology to stay ahead of fakes/ duplicates. As a solution to counterfeit, manufacturers need to do something different on product or packaging which makes the brand different from counterfeits and helps in the authentication of its genuineness at the point of purchase.

Corporates may adapt anti-counterfeit technology/ actions such as overt, covert, forensic, track and trace, authentication, investigation and regulation. Various anti-counterfeiting packaging solutions that can be implemented are:

Retrogram (3M offering, holographic images and hidden image visible through beam of light)

Tampergard (3M technology, coloured stickers with tamper evident feature, Visible and hidden feature)Coloured holograms ( 3D effect, nano text features)

193 http://www.indiapackagingshow.com/paper/GlaxoSmithKline.pdf last accessed on March 21, 2012194 http://www.afdo.org/Resources/Documents/4-news-and-events/past-presentations/070619Food1600SpinkFinal.pdf Last accessed on October 12, 2012195 Emerging Trends and needs in Food and Pharma Packaging

Rs

RFID (Semiconductor micro chip, track and trace in supply chain)Cryptogalph ( invisible mark, encrypted data, detection using image scanning device, impossible to reproduce

The producers maintain elaborate security measures to ensure that their trade secrets of unique processes remain protected. The right holders also issue “cease and desist” letters requesting retailers to cease infringing those trademarks or registered designs and also undertook raids with the assistance of local authorities. They also use technological deterrents to counterfeiting, such as

Thus brand owners in the food industry use several anti-counterfeiting techniques such as barcodes, holograms, and RFID to

up customer trust as he is assured that the product is genuine. Implanting an RFID or a barcode on individual package helps in

the information. Serious health issues related to the consumption of tampered and counterfeit packaged products is increasing the demand for high-level security in the product supply chain.

196 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012197 http://goliath.ecnext.com/coms2/gi_0198-669158/5-Anti-counterfeit-packaging-by.html last accessed on October 12, 2012

Mobile phones represent a huge multi-billion dollar industry which has seen high levels of activity by grey market operators. Health issues (from higher levels of radiation) and personal safety are of prime importance. There have been reports of fatalities from explosions of fake mobile phones.In India, most of the counterfeiting of mobile phones though technically non-deceptive is practically deceptive as most Indian customers seem unsuspecting and unaware. However, there is a large base of customers who knowingly buy low priced fake mobile phone for style / status considerations.

neighbouring countries which are either sub-standard or of questionable quality has begun to pose a serious challenge to Indian customers and manufacturers.This study aims to ascertain the grey market percentage in mobile phones sector using the total supply and demand amounts

industry on account of grey market transactions.

ObjectivesThis study aims to ascertain the grey market percentage in mobile phones sector using the total supply and demand amounts pan


Overview

subscriber base is expected to continue growing.

In India, most of the counterfeiting of mobile phones though technically non-deceptive is practically deceptive as most Indian customers seem unsuspecting and unaware. However, there is a large base of customers who knowingly buy low priced fake mobile phone for style / status considerations. Counterfeiting in case of mobiles may be also of non-deceptive nature whereby consumers are well aware that they are buying a fake but bought it on price and style/ status considerations.

In addition to the existing set

either sub-standard or of questionable quality has begun to pose a serious challenge to Indian customers and manufacturers .

There have been cases of mobile phones explosions on account of counterfeit batteries which have a short circuit or suddenly overheat. Health issues (from higher levels of radiation) and personal safety are of prime importance in case of fake products from non-genuine manufacturers.

199 http://www.verimaster.co.uk/news/52/56/One-Out-of-Every-Five-Mobile-Phones-Could-be-Fake, NOKIA estimates200 Indian Cellular Association Mobile Cellular Handsets Market 2001-2011 and latest estimates for 2012-2020

Industry Facts

The data sources used and approach to analysis for estimating the grey market in Mobile phones are provided below.


total supply as per the under mentioned formula.

Hence the study looked for another reliable source of information for calculating the consumption expenditure on mobile segment. The value of consumption in a particular sector can be also taken as summation of the value of domestic production for local use (net of exports) and the value of imports in ready to use condition.

Hence taking a cue from above, the consumption expenditure for mobile sector has been taken as a summation of mobile phones produced in India for domestic consumption as per Indian Cellular Association

These codes have been closely analysed to identify those pertaining to the mobile telecommunication segment and are prone to counterfeiting/ smuggling/ tax evasion.

phones used for cellular and wireless networks. The value of mobile phones produced in India for domestic consumption is estimated

As part of industry association discussions we have obtained the data for mobile phones produced, sold, exported and imported in India from ICA. There is a difference between the production estimates as per ASI data and that of ICA in respect of the total number of mobile phones produced in India for domestic consumption. The said difference can be attributed to counterfeits and illegitimate trade.

After ascertaining the value of domestically produced goods the study determines the value of mobile phones imported using data

ASI codes on one to one basis for the currents sector.Import data on telephone instruments (push button type) imported for cellular and other wireless networks and video phones have been considered.

supplies from registered micro enterprises to this market.

201 ICA estimates for Mobile Cellular Handsets Market 2001-2011 and latest estimates for 2012-2020


Consumption




crores.

Figure 32: Mobile Phone Supply

Figure 33: Mobile phones Consumption Supply Gap 2010


Rs


crores.



Validation

Meetings and data obtained from Indian Cellular Association has been used as inputs for validation.

202 Growth rate of 2011 and 2012 has been calculated on the basis of ICA estimates for Mobile Cellular Handsets Market 2001-2011 and latest estimates for 2012-2020




The tobacco industry has high tax incidence, making it lucrative for smugglers, counterfeiters and illicit traders. The smuggling of tobacco products may entail both genuine and counterfeit products and most of it shares the same distribution and transport channels as the original product. Cigarettes on account of convenience of production with limited investment, consumption in large quantities, no special

Researchers have detected signs that counterfeit cigarettes have higher (and sometimes considerably higher) levels of tar, nicotine, lead cadmium and carbon monoxide causing higher health risks. Thus the customers face additional serious and unforeseen health risks.

ObjectivesThis study aims to ascertain the grey market percentage in tobacco sector using the total supply and demand amounts pan India


Overview

India is the second largest consumer of tobacco products and third largest producer of tobacco in the world. A varied range of

patterns of tobacco use in the country.

In India, the tobacco industry is divided into three distinct and powerful sectors: bidis (smoking products hand-rolled in tendu leaves), smokeless tobacco (mainly chewing tobacco) and cigarettes.

smugglers and counterfeiters.

The smuggling of tobacco products may entail both genuine and counterfeit products and share same distribution and transport channels as original product. The customs data on search and seizure may also not distinguish between the two, hence making the data unreliable.

Abuse of trademarks (brand names) is the most common form of intellectual property infringement in the tobacco sector. There may be rare instances of patent or design infringement and copyright infringements do not apply to tobacco sector. Cigarettes are the most counterfeited item on account of ease and convenience of large scale production at small investment, consumption in large

Transport of counterfeits is usually by containers, using the same distribution systems as legitimate products, with the products either

be falsely declared or trans-shipped through free-trade zones to complicate document trails.

points in geographically diverse ports or free-trade zones, as a means of disguising the nature of the product and complicating the tracking and detection of the shipments. They may also utilise sophisticated disguising techniques, such as innocuous top loadings and fake documentation, to hide the true nature of their cargoes.

203 First Global Adult Tobacco Survey (GATS) – India 2010, World Health Organization (WHO), October 2010

205 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012206 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012207 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012208 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012209 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

TobaccoIndustry Facts

The consumers are deceived and face additional serious and unforeseen health risks. Researchers have detected signs that counterfeit cigarettes have higher (and sometimes considerably higher) levels of tar, nicotine, lead cadmium and carbon monoxide causing higher health risks.

For consumers who willingly purchase counterfeit cigarettes, there is little risk (apart from the obvious potential health risks) from their purchasing decision, as they are unlikely to be apprehended and prosecuted for the purchase of small quantities of these products.211

disadvantaged sectors of society and the young. Cheap counterfeit tobacco products cut across the efforts of health authorities to blunt the consumption of tobacco through high taxation.212

trade causes harm worldwide is by making cigarettes more available and affordable. Smuggling whether of genuine or counterfeit

among those most likely to be effected by availability of lower-priced, smuggled cigarettes. Studies show that young people are more responsive to the price of cigarettes than older people. Others who are more responsive to price changes are less educated people and lower-income people.213

youth and other new customers, they boost sales and consumption and make it harder for smokers to quit. As a result, illicit trade

The economic cost of counterfeiting is lost sales to genuine manufacturer, costs of anti-counterfeiting operations, development of new methods of manufacture to minimise opportunities for imitation and to provide secure product recognition, associated personnel costs and loss of company image.

Counterfeit cigarettes have quality problems and except in the appearance of the packaging, may bear little resemblance to genuine products. Since counterfeits are marketed under well-known brand names, the consumers may associate poor quality with the original brand hampering the image and reputation of genuine brands and lost revenue if the consumer switches brands. It may also lead to the closure or consolidation of manufacturing facilities, leading to job losses and downstream effects on local economies and government revenue.216

The economic harm also encompasses loss of tax revenue to government, undermining public health strategies, posing unfair

It is possible to get cigarettes for smuggling at much lower prices because counterfeit are easy to make and light to transport,

price differential between various countries.

volumes of cigarettes avoiding taxes. It often involves diversion from legal trade channels of entire container loads, each carrying

it is almost impossible for authorities to track the movement of cigarettes over international boundaries and through the hands of

a serious crime.

cigarettes. Higher tobacco taxes are not reducing the number of cigarettes smoked but increasing the number of illegal cigarettes

210 Economic Impact of Counterfeiting and Piracy, by OECD 2008211 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012212 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

214 World Health Organization. Report on the World Tobacco Epidemic, 2008: The MPOWER package. Geneva; WHO; 2008. p 7. Available from: www.who.int/tobacco/mpower/en/.215 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012216 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

2004. p 6. Available from: http://www.gao/gov/cgi-bin/getrept?GAO-04-641

smoked. Similarly, in India, high taxes on tobacco products are expected push users towards consumption of bidis and illicit cigarettes rather than reduce the overall consumption levels. Cigarettes are a highly taxed product and hence offer a lucrative tax arbitrage opportunity, which in turn can act as a trigger for illicit trade in the product.

Other key factors determining illicit trade rates include existing smuggling routes and black markets for other products in the country, the presence of organized crime, government policies toward cigarette smuggling, corruption, and even the marketing strategies chosen for a country by the major cigarette companies.221

to produce look-alike packaging, with sophisticated and less expensive computer scanners and printers. Many cigarettes sold by Internet retailers are illicit because taxes are not paid, whether by retailers or smokers. The Internet sellers also provide a useful

the growth of online trading websites, it has become possible for ordinary people owning computers to become tobacco smugglers from their homes.222

Thus tobacco smuggling raises several health-related concerns. Smuggled cigarettes compete with legal cigarettes, cigarette consumption in the face of smuggling can be higher and cigarette prices may be lower than they would be in the absence of smuggling. The presence of smuggled cigarettes can put legitimate retailers at a competitive disadvantage, leading some to be less compliant with tobacco-control laws than they would be in the absence of competition from a black market. Contraband cigarettes generally avoid other restrictions and health regulations, such as requirements for health-warning labels in the local language,

organized crime networks to develop as a relatively low-risk source of revenues for these networks.

The presence of organized crime networks in black markets in cigarettes can place additional pressures on legitimate distributors 223 A report titled ‘Tobacco and Terror: How

organisations.

The data sources used and approach to analysis for estimating the grey market in Tobacco are provided below.


supply as per the under mentioned formula.

proportion of total tobacco segment has not been considered for the purposes of this study on account of its low per unit value and almost absence of counterfeiting/ smuggling in this segment.

Washington, DC: CTFK; 2003. p 4. Available from: http://www. tobaccofreekids.org/campaign/global/framework/docs/Smuggling.pdf Euromonitor International, Illicit Trade. In: Global Report: Tobacco – World, 2008.221 Joossens L, Chaloupka F, Merriman D, Yurekli A. Issues in the smuggling of tobacco products. In: Jha P, Chaloupka F, editors. Tobacco control in developing countries. New York City: Oxford University Press; 2000. p 403. Available from: http://www1.worldbank.org/tobacco/tcdc.asp.

223 Issues in the smuggling of tobacco products, http://tigger.uic.edu/~fjc/Presentations/Scans/Final%20PDFs/tc393to406.pdf last accessed on June 4, 2012


Consumption


pertains to bidis, chewing tobacco and other categories of non-smoking tobacco. Since bidis were not included in the production of the total

expenditure.

ASI data gives the list of various tobacco products such as smoking/non-smoking tobacco, cigarettes, chewing tobacco code wise

tax evasion.

August 29, 2012

Table 13: NSS Codes Tobacco


321 Cigarettes

322

323 Snuff

Hookah tobacco

Cheroot

326 Zarda, Kimam, Surti

Other tobacco products

Figure 34: Household Consumption Quantity on Tobacco



pan masala, zarda etc. have been considered (bidis were excluded).

After ascertaining the value of domestically produced goods the study determines the value of goods imported for the tobacco

data for cigarettes, cigars, cheroots (in consumable form) has been considered.

The value of imports has been supplemented with the tobacco products 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 engaged in the production of tobacco has been analysed and it revealed that most of them are engaged in production of bidi.

The value of total supply of tobacco products domestically produced by factories, micro and small enterprises and imports is

pdf, last accessed on August 29, 2012

Figure 35: Domestic Production for tobacco as per ASI(Quantity)

Figure 36: Tobacco Products Supply

bidis which is largely carried out by the unorganised sector in India.

crores.


Estimation of size of industry

in NSSO data hence TII’s estimate is being taken as industry size.


Figure 37: Tobacco Consumption Supply Gap 2010





Supply Gap 2010

Validation

Industry Validation

triggering duty/tax evasion and incentive for counterfeiters.

shorter period of time without leaving much of a footprint.

Data Validation

Figure 38: Tobacco Consumption Supply Gap 2008

Figure 39: Tobacco Consumption Supply Gap Comparison

Gap Rs 3,638 crores

RsRs

Strategies to reduce illicit trade have ranged from government investigations and litigation to use of high-tech devices for tracking cigarette packages, making smuggling easier to detect. At the international level, countries are working to write a comprehensive action plan in a treaty to supplement the Framework Convention on Tobacco Control (FCTC).226

Tobacco companies have introduced covert product-authentication devices in their products, and these have assisted their own personnel to identify counterfeit products at points of sale and during Customs and police operations. However, overt devices that

can only buy cigarettes in regulated outlets. The reason for this might be that in case of strict regulation, consumers know that the cigarettes they buy in places other than authorised stores are likely to be illicit (including those that are counterfeit).

indicate the level of success of those measures, as the quantity of counterfeit cigarettes that go undetected is unknown. Some

area or market, and cannot be extrapolated to determine the overall consumption of counterfeit cigarettes, or the success of anti-counterfeiting strategies.

Fighting counterfeiting is a long term investment whose impact is not measurable in the short run but the impact would be noticed

deterrents than the court orders and civil damages available under private law.

High and differential inter-state taxes on tobacco has resulted in large and growing market of illegal and tax evaded cigarettes. FICCI CASCADE in their deliberations in different cities with industry representatives and which was widely covered by media has

227 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012228 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012229 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012230 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

Other Sectors

detailed study needs to be undertaken to better understand them along with their sub-sectors.

goods, are crucial for improving a patient’s health and counterfeits / sub-standard drugs pose a serious threat to life.

Overview

the middle income category households, increases private investments in health infrastructure, higher health insurance penetration and improved patent protection approvals.231

Any type of counterfeiting in pharmaceuticals segment can affect public health and safety standards, threatening human life. Drugs, unlike other goods are crucial for improving a patient’s health and a counterfeit product, instead of treating, cause deterioration in health posing serious threat to life. The drugs industry is also prone to infringement of intellectual property rights where patent and trademark rights violation is carried out through mislabelling or misbranding. Counterfeiting can take the following forms:

Such counterfeited drugs may be slow/ ineffective in treatment and may result in increased public welfare costs to the government and loss of consumer trust in the medical fraternity.

Counterfeit pharmaceuticals have far-reaching public health implications and have therefore attracted considerable concern from

may include correct ingredients in incorrect quantities or composed according to a wrong formula, non-active substances all together, toxic substance, or correct content but in fake packaging.232

Developing countries are particularly affected due to weak drug regulatory control and enforcement. The problem is further exacerbated by a number of other factors: scarcity and/or erratic supply of basic medicines, uncontrolled distribution chains, large price differentials between genuine and counterfeit medicines, lack of effective intellectual property right protection, lack of regard

231 India Pharma 2015, Unlocking the potential of Indian Pharmaceuticals Market, By McKinsey & Company 232 Economic Impact of Counterfeiting and Piracy, OECD, 2008

for quality assurance and corruption in the health-care system.233

and vitamins. In trans-border counterfeiting, the initial determination with respect to intellectual property violations most often lies with the customs authorities. However in case of pharmaceutical segment a complex and time consuming process of chemical analysis is required which may be cumbersome and impractical.

drugs include high volume and/ or high cost and lifestyle drugs whereas in developing countries a wide variety of drugs are counterfeited with overall counterfeiting getting worse.

Chennai respectively were substandard.236

total pharmaceutical market.

Counterfeiting in pharmaceutical segment involves deception of patients, healthcare providers and suppliers of genuine products

through mislabelling or misbranding.

patent violation and hence these types of violation are invoked less frequently.

233 Economic Impact of Counterfeiting and Piracy, OECD, 2008234 Economic Impact of Counterfeiting and Piracy, by OECD 2008

last accessed on August 7, 2012 236 Study of Essential Drug Quality in Two Major Cities in India, By Roger Bate, Richard Tren, Lorraine Mooney, Kimberly Hess, Barun Mitra, Bibek Debroy, Amir Attaran237 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012238 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

Table 14. Comparative study of spurious drugs based on sample survey in nine segments

No. Criterion CDSCO Report WHO Report

1 Sample Size

2 Counterfeits Suspects

3.1%

3Analysis results

size)Coverage Area

District Head-Quarters, Towns and Villages

District Head-quarters

Counterfeit products may enter the legitimate distribution channels from sources in the illegitimate channel through distribution channels and at retail levels. Another form of distribution channel is internet websites which are created to establish an Internet pharmacy, exploited by selling counterfeits to unsuspecting consumers and then dismantled when the potential of being discovered

increases. Internet pharmacy may be located anywhere in the world, irrespective of its advertised location, and may not have a

The market for counterfeit pharmaceuticals works on franchising (applying brand of original product), parallel trading (mixing genuine and counterfeit consignments), diversion or illegal trading (resale of promotional samples or the fraudulent adulteration of expiry dates), substitution (inferior quality ingredients substituted for genuine ingredients) and adulteration and reuse (retrieval from clinical waste and recycling for resale).

The factors facilitating drug counterfeiting are:

easily set up shop in one country and can export to vulnerable countries.

dealing with manufacturers, tracking offending importers and distributors around the country.

drugs.

market

almost perfectly.

about counterfeiters with the international agencies or local law enforcement agencies are indicative of a broken link in an

economic conditions, alternative medicine options, culture of the society (some cultures have a proclivity towards self-medication

extraneous to the health system.

health. The consequences of counterfeit medicines, in addition to endangering the well-being and lives of patients, are:

medicines

pharmaceutical sector


241 http://www.greaterkashmir.com/news/2008/Nov/4/the-thriving-business-ii-23.asp last accessed on November 16, 2012242 European federation of pharmaceutical industries and associations position paper available at www.efpia.eu:8081/.../MEDICRIME%20Convention%20EFPIA%20...

end up getting sick when they believed they were protected. They may not recover from illness as quickly as they would have with

is the acceleration of new, drug-resistant strains of viruses, parasites and bacteria. Counterfeit medicines for infectious diseases

The manufacturing of counterfeit bulk is often done in unapproved factories and under conditions not consistent with applicable health and safety regulations. Another challenge arises when counterfeit pharmaceuticals are so prevalent that the limited resources are unable to control the problem, wherein many rights holders leave the country.


the size

Taking counterfeiting percentage at 5% as per Ministry of Health and family Welfare under Government of India publication, this study estimates the loss to industry at Rs. 4,274 crores per annum.

There is no simple solution or remedy that can be applied to eliminate counterfeit medicines nor can the problem be solved by an individual company or government. The problem has reached a global dimension and needs a global approach.

annum.

243 Background Document on Counterfeit Medicines in Asia, available at http://www.whpa.org/Background_document_Counterfeit_Medicines_in_Asia.pdf last accessed on October 31, 2012244n http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

August 22, 2012246 Planning Commission Working Group on Pharma report 2010247 Ibid 248 http://www.who.int/medicines/services/counterfeit/overview/en/index1.html249 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201250 Supply Chain Integrity, Fighting counterfeiting in healthcare (GS1) available at http://cii.in/WebCMS/Upload/Mr.%20Ravi%20Mathur.pdf last accessed on October 22, 2012

Manufacturers must continuously update the technologies employed in order to outwit counterfeiters, who are able to copy or

police forces, carry out investigation and detection of counterfeiting activities. Further technology such as RFID (Radio Frequency

counterfeiting, these are being reproduced by counterfeiters in jurisdictions where labour is abundant and inexpensive.

The adoption of any given technology is a complex question involving issues, amongst others, of cost, compatibility, feasibility and reliability, and there are divergent views on which technologies should be adopted and the timing for their adoption.

Although counterfeit drugs could possibly contain the proper amount of active ingredient, they are still dangerous because they originate from a criminal intent. It is imperative that counterfeiting is recognised as being illegal; due to the widespread and circuitous route that it takes to reach the consumer it must be policed internationally.

At a national level, each country should develop appropriate medicines policy options, legislation, and enforcement strategies

profession, governmental organizations, public interest groups and consumer groups, etc. in efforts to prevent the supply of counterfeit medicines. Measures are often effective when carried out by all concerned working together.

responsibilities of the institution(s);

251 Anti-counterfeit Packaging in Pharmaceutical Industry: Review252 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 201 253 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012254 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

last accessed on September 18, 2012256 http://www.who.int/medicines/services/counterfeit/overview/en/index2.html last accessed on October 31, 2012257 http://www.who.int/medicines/services/counterfeit/overview/en/index2.html last accessed on October 31, 2012

Table 15: Anti Counterfeit Packaging Techniques Comparison

Sno. 2D Barcodes Holograms RFID

1 Mass Encryption Technology.as genuineness of the product by consumer..

signals.

2 Three Formats are linear, scripted and 2D matrix.

Applied at blister pack level. Active and passive depending on their source of electronic power.

3 Information carried National Drug Code, writable memory, transponders that emit mes-sages readable by specialized RFID reader.

Track and trace product in supply chain. Track and trace product. For authentication, information is retrieved from manufacturers/ retailers database.

It is extremely cost effective. Cost is paise per code.

It is generally costly.

cases involving counterfeit medicines and impose appropriately severe penalties on convicted offenders. In addition, courts should

Combating counterfeiting of medicines is a shared responsibility to which all interested parties have to contribute. Non-governmental organizations or community based organizations such as consumer associations should be informed about the problem of counterfeiting and the possible presence of counterfeit drugs in the national distribution chain. They should be provided with information and methods for detection so that they are able to report cases to the national drug regulatory agencies.

campaigns directed at the general public should be established and the public should be advised to buy medicines from legitimate sources rather than from peddlers and hawkers or from market places and streets. Consumers should also be encouraged and advised to report to their prescribers or physicians any lack of improvement in their health status in spite of the treatment or any adverse reactions experienced.

In the wake of privatization and liberalization of world economy there should be greater cooperation between countries at sub regional, regional and international levels in developing common strategies, timely exchange of information and harmonization of measures to

At a global level, a more effective response to the threat of counterfeit drugs could be the development of an international convention to control trade in counterfeit and substandard drugs.261 Health professionals are required to be on alert for any failure of a drug to bring about effective treatment and encourage their members to use only trusted sources of supply. Consumers should be educated to adhere to their physician’s instructions. In addition, patients should be informed of expectations of the treatment and also of adverse

when a treatment does not work as anticipated. They must also be educated to report it to the healthcare professional, and not panic when a drug alert is announced.262

legislative and regulatory mechanisms; technology; strengthening of enforcement mechanisms, availability of appropriate resources with international collaboration; consumer education and communication; and stringent practices/control of the supply/distribution chain. These actions involve various actors working in the manufacture, distribution, sale and regulation of pharmaceutical products.263

sales loss to industry. The total expenditure on items like sugar, salt, dry fruits, spices, pan ingredients, minor consumer durable goods and other household consumables was estimated from NSS data.

mark.

The total expenditure on items like sugar, salt, dry fruits, spices, pan ingredients, minor consumer durable goods and other household

258 http://www.who.int/medicines/services/counterfeit/overview/en/index2.html last accessed on October 31, 2012259 http://www.who.int/medicines/services/counterfeit/overview/en/index2.html last accessed on October 31, 2012260 http://www.who.int/medicines/services/counterfeit/overview/en/index2.html last accessed on October 31, 2012261 http://www.who.int/medicines/services/counterfeit/overview/en/index2.html last accessed on October 31, 2012

last accessed on September 18, 2012263 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm last accessed on September 1, 2012

The social contract theory presumes a contract between an innovator and the society where the innovator expects certain protection or exclusive rights over the product/process and society agrees to pay a higher price for such products in return for an

266 This social contract is broken when grey market operators step in and offer counterfeits/imitations/non-tax-paid goods at lower prices.

The grey market operator does not follow the genuine maker’s credo of combining quality and functionality of goods. A counterfeiter and the consumer of such goods (whether aware or unaware) unbundle these two aspects of a product and compromise on one or both the aspects. The presence of counterfeit goods, has the effect of decreasing the demand for the original by:

The original good has to work harder to ensure its status or reputation for quality perhaps by incorporating more expensive features until it is copied once more and the whole cycle begins again. Thus, the grey market discourages genuine producers from operating and innovating, dragging down the standard of the whole ecosystem.

Some researchers argue that in countries with high income inequality (such as India) counterfeit goods increase overall quality and reduce the prices of older, more inferior goods which were the only options for lower income population .This segment of population

would never anyway have bought the original good but the counterfeiter ensures, in a bid to sell more, that the overall quality available to that segment improves as he tries to closely imitate the original goods.

up hurting the society by discouraging genuine innovators from working to bring out better products/processes. Incalculable harm

The grey market, thus, does not serve the best interests of all stakeholders.

for both consumers and enforcement personnel to distinguish between real and fake goods. Counterfeiters have often shown that they are well organised, adaptable and are now using more covert and sophisticated measures to avoid detection and prosecution.

Media and industry reports and anecdotal stories often assert that there are public health and safety consequences to counterfeiting

goods is not only an intellectual property and trade problem, but also as an unrecognized public health problem with particular

death associated with counterfeit goods, particularly drugs, alcohol, cigarettes, foods, and personal care items.

Counterfeiting cannot be considered as a “soft crime” when it comes to health issues (such as in pharmaceutical industry) which involves substantial costs in both developed and developing countries. Counterfeiting and piracy have damaging consequences for consumers involving extortion of a higher price, consumer deception on product quality triggering health and safety risk with absence of after-sales service or any effective recourse in the event of damage or injury.

Millions of fake products are being produced and shipped around the world to developing and developed markets alike at increasingly alarming rates. Millions of consumers are now at risk from unsafe and ineffective products, while governments, businesses and

and the longer-term implications of the continuing growth in this illicit trade are enormous.

265 According to Social Contract Theory, morality consists in the set of rules governing behavior that rational people would accept on the condition that others in society accept them as well. Each person agrees to follow the laws of the state on the condition that everyone else does

csus.edu/indiv/g/gaskilld/ethics/sct.htm last accessed on November 29, 2012266 The Contract Theory of Patents’, International review of Law and Economics, 23:4, 365-380267 Counterfeit Goods and Income Inequality’, IMF Working Paper WP/01/13, Scadizzo.S, 2001

last accessed on October 1, 2012 http://www.iccwbo.org/advocacy-codes-and-rules/bascap/about/ last accessed on October 16, 2012

270 http://www.iccwbo.org/advocacy-codes-and-rules/bascap/about/ last accessed on October 16, 2012

Counterfeit goods could be mechanisms of unintentional injury, or may trigger other diseases and therefore contribute to the global

few exceptions, no peer reviewed public health journal, or public health academic institution, nor agency has published materials

provide a code for diseases associated with counterfeit goods, nor for them as a mechanism of injury.

characteristically factor in all tangible and intangible elements in their dealings which includes the so-called ‘national character’. Thus, the cost of business or the cost of capital for the entire country tends to rise because a certain section of the population indulges in dabbling in the grey market.

However the estimation of impact of such counterfeited and smuggled goods on the public health, deaths caused, increase in crime, deteriorating employment conditions, environmental damage in monetary terms is extremely challenging and can be taken as a separate research study.

This study has revealed the convergence of four key factors that make the Indian market susceptible to grey market operations.

(a) Market Attractiveness:

Few economies today have such rates of growth in consumption expenditure and while this attracts industry, this is equally attractive for grey market operators. Studies have shown that production and trade in counterfeit and illicit goods are driven by economic motives and key motives of such grey market operators are gaining high returns within a short period of time. The famed ‘bottom

Few economies today have such rates of growth in consumption expenditure and while this attracts industry, this is equally attractive for grey market operators. A growing economy provides a period of experimentation or absorption which works well for both licit and illicit operators. Studies have shown that production and trade in counterfeit and illicit goods are driven by economic motives and

271 International Intellectual Property Institute, Counterfeit Goods and the public health and safety available at http://iipi.org/2003/06/increase-in-

272 http://pib.nic.in/newsite/erelease.aspx?relid=73098 last accessed on August 9, 2012273 Economic impact of counterfeiting and piracy, OECD, 2008274 Economic impact of counterfeiting and piracy, OECD, 2008

Key factors that are making Indian markets susceptible to grey operations

Market Attractiveness

Distibution

EnforcementChallenges

CustomerUnawareness

Table 16. NSS 61 and 66 consumption comparison

Monthly Per Capita Expenditure (MPCE) in Rupees

NSS 61 NSS 66Change

Rural

key motives of such grey market operators are gaining high returns within a short period of time.

distribution networks. This creates an ideal situation for the grey market to operate since the original right holder will have to navigate the complex labyrinth to try and enforce his rights. The rising cost to serve all areas, multiplicity of tax regimes and consequential arbitrage potential (some products), lack of track and trace technology, and reluctance to innovatively price products (some producers) remain pertinent issues for investing in upgrading distribution networks to reach to the base of the “pyramid”.

deceptive counterfeits and pass-off products.

(c) Enforcement challenges: The twin challenges of enforcement can be summarized as (i) resource crunch of the State enforcement agencies and the priority of resource allocation to these cases vis-à-vis other law and order issues which demand urgent attention.

counterfeiters by nature are always one step ahead, the lag time of catch up among Indian agencies is much longer (ii) the time and

punishment that can be imposed is not seen as a commensurate deterrent by the offenders. Indian courts have huge numbers of pending cases which makes justice delivery a painfully long process, defeating the very purpose of having a grievance redressal system.

(d) Customer unawareness:

problem is a crucial issue . In India, the lack of consumer awareness and advancement of technology have been cited as two major factors which encourage counterfeiting which gets further fuelled by enforcement challengespreferences, while highlighting the demand side of counterfeits has categorised top deterrents for reducing counterfeit demand as consumer awareness of health and safety risks arising out of such purchases.

Everyone loves a good bargain particularly if a status good look-alike can be bought at a fraction of the original price. If anything bad happened on the way from the factory to the seller, the buyer usually does not know the whole story. Therefore, it is easy to consider counterfeiting as a ‘victimless crime’ because ‘nobody gets hurt’. This, however, is far from true.

A grey market product is often produced in a sweatshop under the radar of law, usually under grim working conditions. A counterfeiter has little regard for any aspect of law, including labour laws that prescribe basic working conditions. Child labour is rampant in this grey market but adult workers have little to cheer about. For most workers in the grey market, their next meal comes from the next day’s work; entitlements like provident fund, gratuity, paid leave and other protection afforded by law by-pass the grey market altogether.

rights of forming a labour union and other means of enforcing their labour rights of collective bargaining and industrial action in case of any mistreatment in the hands of management. This would not only result in issues of labour exploitation but also human rights violation.

There are three main effects of counterfeiting on employment

services decline.

employees directly employed in the sector.

275 Association of Consumer Research, Product counterfeiting and manufacturers beware, available at http://www.acrwebsite.org/search/view-conference-proceedings.aspx?Id=6411 last accessed on September 4, 2012276 http://www.altacit.com/pdf/COUNTERFEITING%20OF%20AUTO%20COMPONENTS.pdf last accessed on September 24, 2012277 http://www.wipo.int/edocs/mdocs/aspac/en/wipo_ipr_jkt_11/wipo_ipr_jkt_11_ref_t16.pdf last accessed on November 25, 2012278 Report of Centre for Economics and Business Research Ltd for the Global Anti-Counterfeiting Group GACG, June 2000, pg 6 and 7

As legitimate businesses are discouraged by rising costs of innovation and ever rising costs of protection to stay one step ahead of counterfeiters, their operating capacity is likely to shrink. Original manufacturers suffer from reduction in sales volume, downward

of anti-counterfeiting measures, and limitations on the scope of business operations. This may lead to lay-offs as such genuine businesses lose market share to counterfeiters. Such laid-off workers are easy prey for grey market operators but have to settle for lower working conditions and lose the umbrella of labour law protection. Thus the grey market exerts a downward pull on the labour market.

Environment

Counterfeits are usually produced with sub-standard, even banned materials, exposing workers directly to dangerous and toxic substances with little or no protection. A silent victim in this process is the environment which bears the brunt of pollution and degradation from grey market operators who do not subscribe to any guidelines or standards of environment protection.

standard goods, causing shortages of water and other natural resources.

Seizure and destruction of counterfeit goods is one way of disciplining the grey market but this comes at a heavy environment cost. ; once destroyed, such goods only contribute to further environment

pollution and degradation besides wasting resources.

The OECD report also cites the chemical industry which has documented cases where the use of counterfeit fertilizers caused

examples of the perils of counterfeit fertilizers.

estimated that the total mass of counterfeits in

Some countries (example, Netherlands) has started stripping counterfeit goods and recycling synthetic parts for public utilities like sporting tracks, bus shelter seats, etc; some countries recycle seized apparel and donate them to charity around the world after removing the fake labels.

There are very few facilities across the world for safe containment or destruction of seized goods and even fewer enforcement mechanisms have evolved to hold the counterfeiter or consignee of counterfeited goods liable for the cost of destruction/recycling.

networks use corruption as a means to further their anti-social activities.

assistance to governments, campaigns for increasing public awareness and “goodwill” costs associated with settling claims by customers who bought faulty counterfeit products. The genuine manufacturers’ incentive to invest in the business growth, research and development may be restricted on account of weak intellectual property rights enforcement and vulnerability to fakes, thereby inhibiting the capital formation in an economy.

public health, primary education, maintenance of infrastructure, public transport, police services, etc face severe resource crunch and the worst affected are the poor and vulnerable sections of the society who cannot afford private services and are dependent on increasingly creaky public services.

The government

health. Therefore, if counterfeiting, smuggling and tax evasion could be reduced across Indian economy, the additional tax revenue can be used to substantially improve the state of public health in India.

279 OECD, The Economic Impact of Counterfeiting and Piracy, page 17280 World Intellectual Property study, December 2010, http://www.cpaglobal.com/newlegalreview/5057/what_becomes_of_seized_counter281 http://cpim.org/node/1322 last accessed on November 13, 2012

All these factors lead to the slowing down of growth of gross domestic product dragging a country’s economy down. This is further compounded by the creation and rise of a parallel economy with generation of non-tax paid or black money with its own alarming

Forming parallel economyReducing economic growthDiluting country’s reputationDiversion of funds to offshore tax havensBringing inequal income distrubution in SocietyInciting Social unrest

Encouraging corruptionFalse reporting of the key economic statisticsEncouraging criminal activites

Criminal consequences

such illegal activities has an underlying anti-social element. Thus counterfeited and pirated products result in generation of slush funds . Society’s security may be jeopardised on account of a nexus between criminals

and counterfeiters and growing incidence of crime, kickbacks and corruption.

Industry experts agree that there is evidence of involvement of organised crime and criminal networks in counterfeiting and piracy

and terrorist organizations that use the sale of fake and unauthorized goods to raise funds and launder money. In order to survive, a

Counterfeiters may use these activities as a means of potential attack by using deadly chemicals, poisons or biological toxins in pharmaceutical sector

The growth in the role of criminal networks in counterfeiting and piracy is a concern for economies as it can undermine civil society .

282 White Paper on International Anti-corruption Coalition, January 2005283 International Anti-Counterfeiting Coalition (IACC) White Paper, Available at http://counterfeiting.unicri.it/docs/International%20AntiCounterfeiting%20Coalition.White%20Paper.pdf, last accessed on March 5, 2012284 International Anti-Counterfeiting Coalition (IACC) White Paper, Available at http://counterfeiting.unicri.it/docs/International%20AntiCounterfeiting%20Coalition.White%20Paper.pdf, last accessed on March 5, 2012285 Factsheet: The impact and scale of counterfeiting, available at http://counterfeiting.unicri.it/docs/First%20GCCCP%20fsheet.doc, last accessed on August 28, 2012286 International Anti-Counterfeiting Coalition (IACC) White Paper, Available at http://counterfeiting.unicri.it/docs/International%20AntiCounterfeiting%20Coalition.White%20Paper.pdf, last accessed on March 5, 2012287 International Anti-Counterfeiting Coalition (IACC) White Paper, Available at http://counterfeiting.unicri.it/docs/International%20AntiCounterfeiting%20Coalition.White%20Paper.pdf, last accessed on March 5, 2012

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Fig. 40:Effects of Black Money

to recognize counterfeiting as a crime and a serious risk to health and safety, enforcement has been lax and penalties and

if not legitimate, business.

Criminal entrepreneurs and illicit networks sometimes also use or exploit legitimate businesses and legitimate global supply chains to . Hundreds of billions of dollars of revenue from these activities

The direct effects of transnational illicit networks are correlated with such societal ills as violent crime, drug addiction and environmental

and over the long term deteriorate economic conditions for competitiveness. In some countries, incentives may be ripe for corruption, which facilitates the activities of illicit networks and distorts development by preventing the optimal allocation of resources and public goods.

Thus these networks impede social and economic development and undermine the integrity and effective functioning of states. Many states experiencing recent transitions to democracy face serious organized crime challenges that, in our increasingly interconnected world, now have global implications. The growing concern is also the potential nexus between criminal organizations and terrorist networks where, in some cases, terrorist or insurgent groups may resort to “marriages of convenience” with criminal entrepreneurs and

288 Global counterfeiting, Background document available at http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last accessed on April 14, 2012289 Albanese, Jay (2003), Organized Crime.290 http://www.oecd.org/gov/riskmanagement/OECD_Illicit%20trade%20workshop_Draft%20agenda_updated_1a.pdf last accessed on October 31, 2012291 Meeting Accra’s Anti-Corruption Commitments: A Call to Action (World Bank/ OECD)292 http://www.oecd.org/gov/riskmanagement/OECD_Illicit%20trade%20workshop_Draft%20agenda_updated_1a.pdf last accessed on October 31, 2012

an estimate of the challenge to the National and State exchequers to initiate formulation of public opinion against grey market prod-

-ment, consumer distrust etc. In an interlocked economy miseries of the industry and consumers get passed on to the government

and health services cost, business shying away from investments on account of non-protection of rights catapulting into loss of employment opportunities.

Counterfeit goods manufacturers do not pay any company/income taxes, it results in lower national tax receipts which either leads

manufacture their products in countries where counterfeiting is rife resulting in reduction in foreign direct investment and knowledge transfer. A counterfeiting-tolerant culture also discourages domestic entrepreneurship and invention.

impacted by consumption of fakes/ spurious products.

In India where the government expenditure is often met by borrowings, additional cost would also entail a component of interest costs that could have been saved if this additional revenue accrued to the government or the government was relieved from having to take such measures.

investments that pay tangible dividends to economic development and society.

293 Global counterfeiting, Background document available at http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last

accessed on April 14, 2012

294 BASCAP Report titled “The impact of counterfeiting on Governments and Consumers May 2009 available at http://www.iccwbo.org/upload-

edFiles/BASCAP/Pages/Impact%20of%20Counterfeiting%20on%20Governments%20and%20Consumers%20-%20Exec%20Summary.pdf last

accessed on June 6, 2012

Revenue Loss: Direct and

Indirect Taxes

Cost of enforcement (crime revention,

detection, regulation & deterrence)

Fiscal costs (borrowing costs on

extra expenditure and on reenue lost)

Increased Public Welfare Cost

Figure 41: Loss to Government on account of Grey Market Operations

Loss to Government


There is very little data on the global economic impact of counterfeiting and the losses to public revenues, employment, investment and innovation . In accordance with the approach set out earlier in the section on “Approach to the study’’, this study aims to

of counterfeiting and piracy on government receipts and expenditures.

The Tax Loss to Government has been estimated as loss in Direct taxes (income tax) and Indirect taxes (value added tax, import duty and excise duty).Revenue Loss to Government = Loss on account of Direct/ Indirect taxes in case entire gap is met by the legitimate manufacturers or importers.Indirect Tax Loss to Government= Excise Duty + Customs Duty+ Value Added Tax

-ticular industry sector

In order to calculate the loss in income tax, following approach was followed:

Revenue Loss to Government = Loss on account of Direct/ Indirect taxes in case entire gap is met by the legitimate manufacturers or importers

sector

In order to calculate the loss in income tax following approach was followed:

For each of the seven selected industry sectors, the annual reports of sample/ representative companies were reviewed for the



Industry Sector -age of sales

Basis of computation

Auto Components

Annual Report review

Alcohol Research Reports

Computer Hardware Research Reports



Mobiles 16.6 Annual Report review

Tobacco Annual Report review

and basis of computation

Industry Sector Estimated Sales Loss to Industry (Rs crores) to industry (Rs crores)

Direct Tax Loss (Rs crores)

Auto Components

Alcohol

Computer Hardware

Tobacco


Table 18: Direct tax Loss to Government

Figure 42: Direct Tax Loss to Government

In order to calculate the loss on account of indirect taxes such as excise duty, customs duty, VAT, following approach was fol-lowed.

For each of the selected seven sectors, loss in sales to legitimate industry on account of grey market operations was calculated. The calculated loss in sales can be met either by domestic production or through legitimate import channels.

It has been assumed that the gap in consumption and supply would be met through legitimate domestic factory and registered

countervailing duty) in case of imports, in addition to value added tax (VAT) in both the scenarios.

The central excise and state tariffs (in case of alcohol) was studied in detail supplemented with discussions with senior former

the above rates to the sales loss to industry.

296 http://www.cbec.gov.in/excise/cxt2012-13/cxt_1213-idx.htm last accessed on August 22, 2012

Table 19: Estimated Sales Loss Sector wise met through domestic production and imports

Industry Sector Sales Loss to Indus-try(Rs Crores)

Sales loss met by domestic production (ASI + MSME) (Rs crores)

Sales loss met by imports (Rs crores)

Auto Components 112

Alcohol

Computer Hardware 111

Tobacco

Total Sales Loss 72,969 63,639 9,330

Table 20: Indirect Tax rates applied

Industry Sector Duty rates

Excise duty

appliedrate applied

Automobiles

Computer

FMCG

Mobiles

Packaged Food

Tobacco

Alcohol

The details of the loss is tabulated in the Table 21.

Table 21: Indirect Tax Loss* to Government

Industry Sector Indirect Taxes loss on Domestic production

Indirect Taxes loss on Import(Rs crores)

Total Indirect Tax Loss (Rs crores)

Auto Components

Alcohol

Computer Hardware 33

122

Tobacco


Figure 43: Total Indirect Tax Loss**

Figure 44: Total Estimated Loss to Government- Direct and Indirect Taxes***


**The loss has been calculated for the year 2012

***The loss has been calculated for the year 2012

Thus, total tax loss estimates to government is Rs 26,190 corores comprising of direct tax losses of Rs 3,504 corores and indirect tax losses of Rs 22,686 crores for the selected seven sectors.

The above losses have been calculated only for the selected seven industry sectors; however if we assess the entire Indian econo-my losses to government could be substantially higher.

Thus more research is needed to ascertain the loss to government across all the economic sectors.

It may be mentioned here that the costs to the government on account of grey market operations in the selected seven sectors is not

in monetary terms.

Figure 45: Total Estimated Loss to Government (Sector wise)*


Counterfeiting and piracy has increased substantially over the last two decades. Today, counterfeit and pirated products can be found in almost every country in the world and in virtually all sectors of the global economy. As policymakers grapple with allocating resources across multiple public policy challenges, better information on the full scope, scale, costs and impacts of counterfeiting and piracy is necessary to ensure that the appropriate resources and prioritization are given to combating counterfeiting and piracy.

Estimates of the level of counterfeiting vary but all estimates agree that counterfeiting represents a multi-billion dollar underground economy with hundreds of billions of dollars of counterfeit product being produced every year.

increased expenditure on public welfare, health services cost, potential loss of investments and loss of employment opportunities.

The estimated sales loss to the industry in the seven selected sectors amounts to Rs. 72,969 crores and the consequential loss to the exchequer Rs. 26,190 crores.

A limited study was conducted on pharmaceutical and other FMCG sectors. Initial estimates of sales loss to industry in these sectors is around Rs. 29,307 crores. Hence, the overall estimate of sales loss to industry, exceeds Rs. 1,00,000 crores annually.

Further research is required to ascertain all the losses suffered by various stakeholders such as consumers, industry, society and government on account of grey market operations.

(Table 22).

297 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011

298 Estimating the global economic and social impacts of counterfeiting and piracy, BASCAP, 2011

Table 22 Estimated Sales Loss to Industry (seven sectors)*

Industry Sector Grey Market(percentage)

Sales Loss to Industry(Rs crores)

Auto ComponentsAlcoholComputer Hardware

Food)

TobaccoTotal Sales Loss 72,969

The loss has been calculated for the year 2012

The detailed literature survey conducted as a part of this study has shown that the grey market encompassing counterfeiting, smuggling and other grey market has acquired an alarming size, become pervasive across all industry sectors and is linked with organized crime. This 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, research and development tends to decline on account of vulnerability to counterfeits and fakes. The counterfeiter-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 in economic terms but have far-reaching impact on national security and the country’s progress.

Counterfeiters have increasingly been proved to have criminal/ terrorist links with little regard to public health. At times they use

Counterfeit products are distributed through various distribution channels and also enter the legitimate channels. Internet has become one of the most favoured carriers of counterfeits. Counterfeit products can be very sophisticated in their appearance and packaging.

solution or remedy that can be applied to eliminate counterfeit nor can the problem be solved by an individual company or government . It would be unrealistic 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.

The current study recommends the following solutions to combat grey market operations.

1. Regulatory Environment

Counterfeiting, Smuggling and Tax Evasion are serious crimes and perpetrators have to be dealt with increased vigour and deter-rence mechanism. There is a need to enhance regulatory mechanism by providing punitive measures to act as a deterrent for counterfeiters and suppliers of pirated goods.

--

ble non-bailable offence, the government administrative machinery can take suo motto action against the offender.

The amount of penalties that can be charged should be enhanced considering the social cost of this crime and should be linked to the quantities of counterfeits seized and the multiplicity of offences. The IACC believes that the best deterrent to counterfeiting and piracy is criminal penalties that result in actual imprisonment.

There should be enhancement and harmonisation of registration and control of trademarks; criminal sanctions in place of civil ac-tions to punish offenders and to act as deterrents; increased coordination through joint efforts and information sharing among law

Further there is need for greater cooperation between governments, law enforcement agencies, and private sector companies to combat a global problem that affects all of them and to build awareness of the counterfeiting problem among government leaders and the public.

The lack of adequate legislation, regulation and especially enforcement and penalties are often invoked as weaknesses that coun-terfeiters exploit. This is especially noted for the legal systems of many economies in transition or developing economies.

The OECD report cites India as an example and explains that due to the sheer volume of litigation judicial delays are common. It points to the complex structure of the local police and metropolitan magistrates supplemented with inadequacy of police resources

rate (i.e. about 2%).

and procedure in respect of copyright and trademark offenses. There is lack of education of the masses, both in terms of illiteracy

http://www.who.int/medicines/services/counterfeit/overview/en/index1.html




302 http://www.oecd.org/fr/sti/industrieetmondialisation/theeconomicimpactofcounterfeitingandpiracy.htm ast accessed on September 1, 2012


increasing the costs.

Increased awareness and continued education of the enforcement authorities, establishing dedicated specialised investigation and

alleviate the problem.

Specialized anti-piracy cells, effective civil and criminal action, education of the law enforcement authorities and decision makers in the government, public awareness campaigns, strict application/implementation of the existing laws by authorities, introduction of zero-piracy policy can help in reducing counterfeiting in the country.

The Indian legal system has an effective legislative infrastructure and robust judicial system but our enforcement agencies are squeezed for resources given the multi- jurisdictional nature of counterfeiting and well entrenched criminal networks that have often been seen to have a close nexus with the underworld and even global terror networks.

The government may also look at establishing special data centres for effective data capturing, analysis and management of infor-mation relating to search, seizure, raids, trade mark/ patent infringements etc and dissemination of analytics for better governance.

2. Consumer Awareness

There is both known and unknown complicity by the consumer who does not mind the ‘bargain’ in case of purchase of non-deceptive counterfeits. Consumer education on the hazards/ risks involved in consumption of fakes along with counterfeiters’ link with organised crime and perhaps terrorism could deter them from making such purchases knowingly.

Consumer motives for buying counterfeits vary widely, from price and easy access to social acceptability and a perception that a counterfeit purchase is a game which falls outside the law and to which there are no consequences. Consumer purchase behaviour

goods and lack of knowledge about it being fake. The deterrents are health risks, waste of money and the belief that genuine products offer services and warranty. Three priby a combination of awareness and enforcement. They are potential physical harm to buyer or their family (awareness), reduced supply of counterfeit/pirated products (enforcement) and threat of prosecution or incarceration (awareness/enforcement). Only when consumers appreciate the full repercussions of their counterfeit purchase they can be expected to stop the practice.

However in case of deception by the counterfeiter, the consumer should be empowered to differentiate between the original and fake by regular interactions and public awareness campaigns. Incentives may be given to consumers to report any fakes.

in promoting piracy and counterfeiting. These are consumers and the counterfeiters. Hence, any efforts taken to address this men-ace needs to be focused on raising awareness and enforcement, with a continuing need for capacity and skill building within the enforcement machinery. Also, a better awareness on the socio-economic consequences of counterfeiting among all stakeholders is vital to put forth this issue more seriously on the political agenda.

Consumer education is extremely crucial in bringing change in attitudes from considering it as victimless crime to the realisation

globe. They should be made aware on how to avoid making such purchases.

304 Report on Anti counterfeiting in selected countries, prepared by anti-counterfeiting & enforcement committee of the International trademark

association, 2004 available at

http://www.inta.org/Advocacy/Pages/Reports.aspx last accessed on April 4, 2012

305 European federation of pharmaceutical industries and associations position paper available at

www.efpia.eu:8081/.../MEDICRIME%20Convention%20EFPIA%20...

306 Report on Anti counterfeiting in selected countries, prepared by anti-counterfeiting & enforcement committee of the International trademark

association, 2004 available at

http://www.inta.org/Advocacy/Pages/Reports.aspx last accessed on April 4, 2012

307 C:\Counterfeits\my downloads\Brands – Registration, Anti-Counterfeiting And Online Issues - Intellectual Property - India_asp.mht

last accessed on March 13, 2012

308 BASCAP Research report on consumer attitudes and perceptions on counterfeiting and piracy, available at

http://www.iccwbo.org/Advocacy-Codes-and-Rules/BASCAP/BASCAP-Research/Consumer-Perceptions/ last accessed on November 26, 2012

last accessed on March 13, 2012

310 http://publicaa.ansi.org/sites/apdl/Documents/Meetings%20and%20Events/2010%20World%20Standards%20Week/Anti-counterfeiting%20

Conference/Anti-Counterfeiting_Best_Practices.pdf last accessed on March 2, 2012

It would be interesting to note that in India, certain companies have undertaken successful consumer campaigns for educating the end user to distinguish between original and fake especially in the industry sectors pertaining to automobiles, pharmaceutical, packaged food, computer etc.

3. Supply Chain Management

The distributors are responsible for knowing their supplier and securing supply chains. The manufacturer should try to secure/ en-hance the integrity of product through legitimate distribution channels. This can be done by strengthening wholesale contracts and monitoring/ auditing supply chains.

Companies should carefully examine operators trying to enter distribution channels and monitor contract manufacturers and distrib-utors already in the supply chain. The proposed organisations should be interviewed and background investigated before allowing them to become resellers or distributors. Once they enter the supply chain, companies should establish strict contracts, perform extensive periodic audits, and maintain close relationships with its outsourcing partners.311

312

It is important for those at risk of purchasing and/or accepting counterfeit products to develop practicable policies and procedures on how to identify, avoid, and correctly handle and dispose of counterfeit products.313

It is imperative that measures be taken to protect the licit supply chain. If reputable wholesalers and retailers ensure that their sources are clean, then the buying of counterfeits will remain a marginal activity. On an industrial level, purchasing agents must be carefully monitored.

an intuitive eye on the distribution channel so as to curtail any illegitimate intrusions.

Anti-counterfeit technologies are of two types namely authentication packaging and track and trace packaging technologies. The major challenges faced by the anti-counterfeit market are the high cost involved in implementing the technologies and apprehension amongst the manufacturers about the extent of security provided by these technologies.

continuously update the technologies employed in order to be one step ahead of counterfeiters, who are able to copy or crack these technologies. On the basis of our discussions with experts and research some of the technological interventions can be:

Track and Trace Technology helps to track forward the movement of goods through various stages of supply chain and trace backward the history, application or location of the goods. It combined with mass serialization enables individual products to be tracked throughout the supply chain, from production to the end consumer.

numbers.

Cloud computing whereby a secret code when scratched on the product and messaged via mobile phone to a given number would give an instant response on the genuineness or otherwise of the product.

Holograms involve multiple technology of overt, covert and forensic and hence can be used for consumer awareness/

311 Global counterfeiting, Background document available at

http://counterfeiting.unicri.it/docs/Global%20counterfeiting%20background.pdf last accessed on April 14, 2012


Conference/Anti-Counterfeiting_Best_Practices.pdf

accessed on March 2, 2012

314 Counterfeit products available at http://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf

last accessed on October 22, 2012

315 http://www.articlesbase.com/home-brewing-articles/global-anti-counterfeit-packaging-technologies-market-for-food-and-pharmaceuti-

cals-20092014-1970096.html

111

Non clonal identityproduct.

Optical Technology

Smart Cards

Microscopic Tags

The technology must be cost-effective, compatible with the product and distribution chain, resistant and durable.316 Such additional costs of the technology would be recovered by the manufacturer in the long run through increased sales volume and increased customer patronage. However in cases of administered prices, for instance in pharmaceutical industry, the government may allow passing on the additional cost to the consumer.

International ISO bodies have published ISO Standards

counterfeit.

Industry members should collaborate with government/non-government organizations and trade associations to strengthen, enact, and enforce anti-counterfeiting laws, and to raise public awareness. They can help in providing leads for police raids, organise consumer awareness programmes and strengthen their products.

horizontally on the issue at hand. Typically, companies grappling with counterfeiting shy away from publicizing the problem, and this silence have led many in the industry to underestimate the enormity of counterfeiting and the amount of assets at stake. Moreover, this lack of dialogue from and between companies dealing with counterfeiting and sales through unauthorized channels is masking the magnitude of the issues’ impact on a company’s bottom line and could be a factor in a major internal challenge which is many businesses’ low prioritization of counterfeiting issues.

A pro-active and preventative approach and strategy may help to ensure that responsibility is shared through a public-private partnership between the government and industry.

The government may look at enhancing the role of investigative agencies giving them enhanced powers of raids and arrest and resolve their infrastructural challenges for increasing effectiveness. Counterfeiters should be deterred through targeted investigations, litigation, prosecution and use of sophisticated technology. The government may look at setting up additional laboratories pan India for product testing and adherence to quality standards.

parts should not be returned to suppliers or recycled, but rather handed to proper legal authorities and destroyed (rendered useless in the intended function).

A co-ordinated national policy for safe storage or destruction of seized goods must be formulated which must be integrated into an international policy so that global grey market networks may be fought on a common footing among nations. Such policy must also


317 http://www.iso.org/iso/catalogue_detail?csnumber=52210 last accessed on November 28, 2012

318 Fighting High Technology Counterfeiting with High Technology Solutions, Available at

http://www.bizforum.org/whitepapers/newmomentum.htm last accessed on September 18, 2012

319 European federation of pharmaceutical industries and associations position paper available at

www.efpia.eu:8081/.../MEDICRIME%20Convention%20EFPIA%20...


Conference/Anti-Counterfeiting_Best_Practices.pdf accessed on March 2, 2012

112

Anti-counterfeiting work is regarded as goodwill raising, and more and more companies are seeing the advantages of publicising their efforts.321

hierarchy with an ultimate aim to maintain a competitive advantage. Seizing counterfeit parts can only keep that product temporarily 322

Organizations should develop a systematic approach to their anti-counterfeiting program including reliance upon standards and best practices to develop a comprehensive anti-counterfeiting strategy, proactive best practices and reactive processes, evaluating organizational and product risk and threats, using authentication technologies appropriate to the organization and product and collaborating with local and national law enforcement agencies as the case may require.323

An obligation for manufacturers to exercise due diligence can be seen as a legal tool for regulators and enforcement agencies

must comprehend almost every risk-related function that it faces and implement response procedures accordingly. The concept, therefore, enters into the realm of risk management. Only the manufacturer of the genuine product knows whether an item is fake or genuine. Therefore, it makes sense that manufacturers should be obliged to assist in identifying copies of their products. The

It is recommended that customer care department in organisations can play an additional role of informing any suspicious cases based on consumer feedback/ complaints to an appropriate authority within an organisation. Such authority may coordinate with the enforcement agencies for prosecution of grey market operators and destruction of such goods. The main responsibility for the industry, according to Interpol, is to ensure that all criminal cases are reported to the appropriate law enforcement agency and that

At an industry level, communication among companies is crucial to enable the industry as a whole to effectively combat counterfeiting. Industry leaders should develop dialogue to share learning, identify new solutions to the problem, build greater awareness of the

Shared discussions, best practices, standards, conformity assessment efforts, and initiatives among all stakeholders will lead to the best solutions.326 A proactive strategy that makes use of consumer awareness campains, best practices accross industry sectors and existing enforcement procedures would go a long way in curbing counterfeiting and smuggling.

communication between companies, organizations, academics, consumer groups, and agencies that are focused on combating counterfeiting by increasing the quality and frequency of dialogue; secondly counterfeiting being a global supply chain problem no one entity can effectively monitor, inspect, and enforce anti-counterfeiting measures across national boundaries or for the entire


322 http://www.bilcaretech.com/pdf/whitepaper/CII_Anti_Counterfeit_Pkg_Technologies_Report_by_Dr_Dhar_Final_17Aug09.pdf, last accessed

on March 21, 2012









113

Rationalising tax regime in the country will help in eliminating tax arbitrage that act as incentives or triggers fo illicit trades. The criticality of maintaining uniformity of tax rates across states for the same set of goods or services and abolishing all local levies like entry tax, octroi, toll tax, carriage tax, etc will facilitate actualising the ultimate objective of a national common market devoid of inter-state/intra-state barriers that exist in the form of varying taxes and tax rates which impedes competition and in turn impacts

market and also help to concentrate the attention of enforcement agencies towards illicit trades operating outside the country.

In conclusion:

There are currently no “harmonised global standards” on anti-counterfeiting technology solutions. Each sector and organisations have been implementing solutions based on their holistic assessment of need from perspectives of risk mitigation needs, practicality of solution, costs etc . These factors such as cost and practicality are even more relevant in the Indian context with multiple distribution channels and millions of retailers some of whom would be present in locations with poor infrastructural facilities. It is therefore recommended that each sector be allowed the freedom to choose appropriate solutions that they

Each sector should set up committees to evolve

on reported incidents of counterfeits /contraband needs to be strengthened. Contraband especially for highly taxed products (like Cigarettes) is a large menace where the tax arbitrage opportunities are exploited by criminal elements to the detriment of the economy, revenue, and society. Similarly in case of counterfeited pharmaceutical or packaged food, where there can be potential life threatening health hazards to society, there should be special laboratories for prompt testing so as to initiate timely corrective action. Further government can set up special task force to conduct raids and related search and seizure operations.

needs to be supported by so that rapid action can be taken against reported incidents of illegal activities.

Choice of particular technology solutions should be left to the organisations to choose from, so long as it enables manufacturers

of purchase may be optional depending on sector needs.

constitute an Expert Committee to formulate an orchestrated strategy with participation from policy makers, representation from enforcement agencies, industry, civil society and organizations working



Annexure I: Key Milestones

Date Key Milestones

Meeting with FICCI CASCADE: methodology and products to be covered

Meeting with Chief Statistician of India: to explain study objectives, meth-odology and seek approval to use data repository of Ministry of Statistics

methodology being adopted for this study

July and August Validation meetings with Industry Associations and Experts

methodology and seek views

Meeting with FICCI economic division

The duration of this study spanned nine months and the key milestones traversed during this period are given below.

1.

2.Elgar Fleisch.

3. Consumer attitudes toward counterfeits: A review and extension, by Celso Augusto de Matos, Cristiana Trindade Ituassu, Carlos Alberto Vargas Rossi.

Chang.

6. Consumer consideration of non-deceptive counterfeit goods: a contingency matrix

Zhang.

11. Study on Rapid Information exchange on counterfeiting and piracy

12.

13.

116

1. Analysis of the demand for counterfeit goods, By Pamela S. Norum, Angela Cuno.

The study evaluates the factors affecting demand side of the problem of counterfeiting in the background of various

studies and legislations only addressing the supply side.

and logistic regression was used to estimate demand functions for counterfeit goods.

Main limitation of the study is method of convenience sampling and the sample students may have greater sensitivity to the

counterfeiting issue on account of educators in textiles and apparel providing education about it.

The study delves into four primary issues:

goods.

counterfeit goods.

Identify whether sensitivity to the counterfeit problem affects purchase behaviour.

Effect of selected socio-economic and demographic characteristics on the demand for counterfeit goods.

The study estimates demand factors on the basis consumer demand theory that is consumers maximize their utility subject

to their budget constraint from which demand functions for various goods and services are derived using logistic regression.

On the basis of data collected, most commonly purchased counterfeit items were handbags and music items.

counterfeit goods for this sample.

If the respondent believed that the buyers and/or sellers were committing a crime, they were less likely to buy

counterfeit goods themselves.

Holding other factors constant, older students were less likely to buy counterfeit goods compared to freshmen students.

Many purchasers of counterfeit goods do not feel they are doing any harm by purchasing these goods.

Consumers who had previously purchased counterfeit goods held attitudes more supportive of counterfeiting than

consumers who had not.

which they identify with most for instance increase in local employment in case of imported counterfeited goods, government

tax revenues, non-funding of organised crime and illicit activities etc.

consumer attitude.

2. Business strategies in the counterfeit market, 331

Counterfeit trade being a multi-billion dollar industry encompassing wide range of goods and markets with diverse complexity,

manufacturing techniques, investments in production facilities, potential dangers or value for the users, and degrees of

The study investigates the existence of strategic groups among counterfeiters based on an empirical examination of coun-

counterfeiters: disaggregators, imitators, fraudsters, desperados, and smugglers.

It aims to differentiate each group’s learning and growth strategies and help practitioners to better position their companies

330 Sarah Hong Xiao & Michael Nicholson (2011): Consumer consideration of nondeceptive counterfeit goods: a contingency matrix approach, The Service Industries Journal, 31:15, 2617-2631331 Staake T, et al, Business strategies in the counterfeit market, J Bus Res (2011), doi:10.1016/j.jbusres.2011.03.008

It raises concerns on the sources of information for the purpose of study and rejects the statements of convicted counterfeit-

ers or those counterfeiters who are able to hide their operations or are tolerated by local enforcement agencies.

It uses anti-counterfeiting experts, affected companies and industry experts as its primary information source on an as-

sumption that the characteristics of counterfeit products allow for conclusions concerning the reengineering capabilities of,

properties of, and investment in corresponding production facilities, the functional quality of the products, and, consequently,

the likely strategic positioning of a counterfeiter’s venture.

from respondents enabling drawing of conclusions on counterfeit producers’ strategies with a cognitive approach basis to

organization, estimated specialization regarding product and brand selection, and estimated output given the (most likely)

applied production technology.

On the basis of above characteristics, counterfeit cases have been investigated

from product categories as foodstuffs and alcoholic and other drinks; perfumes and cosmetics; clothing and accessories;

electrical equipment; computer equipment (hardware); watches and jewellery; cigarettes; pharmaceutical products;

mechanical parts; and fast-moving consumer goods.

Findings from the study can be summarised in the following table.

Capabilities Strategic Focus

Disaggregators Established pro-duction network or develop own produc-tion skill.Flexibility to follow new trendsQuickly.

dominantsource of income.Serve customers’ desire to signalwealth and status.

Flexibility. Focus on goods with high demand. Reaping short term

Clothing and accessories.

Imitators Solid re-engineeringand engineering skills.Extended productionCapabilities

-celerator.Compatible productsat low price.

CompetitiveAdvantage.Entrepreneurship

Clothing andAccessories.Fast moving consumer

Fraudster Some productionCapabilities.

-bler for goods.Deceit of customer.

Opportunism. cosmetics

Desperados Ability to conceal illicit activities.

-bler for selling danger-ous products.Deceit of customer.

-tion withan absence of ethic standards.

Smugglers Manage network of criminal actors.Money laundering.Insulating individual steps within the value chain from each other.

-prove market access.Evading taxes.

Extend power in criminal network.Established structures, long termOrientation.

Cigarettes.

3. Consumer attitudes toward counterfeits: A review and extension, By Celso Augusto de Matos, Cristiana Trindade Ituassu, Carlos Alberto Vargas Rossi.332

The study proposes and tests statistical model that integrates predictors of consumers’ attitude and behavioural

behaviour toward counterfeits and create effective anti-piracy strategies.

also.Risk aversion and perceived risk suggesting that some consumers possess a personality trait making them

Integrity involving ethical standards of the consumer.Subjective norm denoting pressure from relatives and friends that can lead individuals to adopt certain at-titudes and behaviours.

non-buyers.

actual behaviour.

study tests the following four hypotheses.A consumer who more strongly believes in the price quality inference has a more negative attitude toward counterfeits.Consumers who are more (less) risk averse will have unfavourable (favourable) attitude toward counterfeits.Consumers who perceive more (less) risk in counterfeits will have unfavourable (favourable) attitude toward counterfeits.Consumers who attribute more (less) integrity to themselves will have unfavourable (favourable) attitude to-ward counterfeits.

332 http://www.emeraldinsight.com/journals.htm?articleid=1590963&show=html last accessed on March 6, 2012

Development of anti-counterfeiting strategy

Anti- Counterfeiting Strategy

Disaggregators Average functional quality.

Imitators High visual and functional quality. 1. Enforcement of intellectual property rights.2. Seizures.

Fraudster High visual but low functional quality. 1. Seizures.

Desperados 1. Consumer Awareness campaigns.

Smugglers Same as main product. 1. Seizures2. Controlled marketing and distribu-tion network.

Consumers’ sense of accomplishment will affect their attitude toward counterfeits.Consumers perceiving that their friends/relatives approve (do not approve) their behaviour of buying a counterfeit will have favourable (unfavourable) attitude toward counterfeits.Consumers who have already bought (have never bought) a counterfeit have more favourable (unfavourable) attitude toward counterfeits. Consumers who have already bought (have never bought) a counterfeit have more favourable (unfavourable) behavioural intentions toward counterfeits.Consumers with more favourable (unfavourable) attitudes toward counterfeits will have more favourable (unfavourable) behavioural intentions toward these productsThe data so collected was analysed using descriptive statistics for the scale items and for the demographic variables; missing values and outliers detection; linearity between the scale items; dimensionality using Exploratory Factor Analysis (EFA); .reliability and validity of the scale items using internal consistency

Not much importance could be attached to gender, age, income level or education.

have a more negative attitude towards counterfeit products. Indeed, many participants who considered that quality is indicated by price revealed more rather than less favourable attitudes. The assumption that higher levels of risk aversion would have a negative effect on purchase decision was also unproven.

intention towards counterfeits, tend to disagree with the notion that higher price means better quality, perceive less risk, places lower value on integrity. Consumers who attempt to have a sense of accomplishment had more favourable attitudes toward counterfeits. These consumers may consume counterfeits as an opportunity to experiment a product innovation, which can be more salient for electronic products.Consumers who have already bought a counterfeit have more favourable attitudes when compared to those who have not posing real threat for the original brands. However this experience does not have a direct effect on behavioural intentions.

such as integrity, values, responsibility and honesty Consumers do not use price as a reference of quality, consider that the reference groups approve their decision to buy counterfeits, which can be viewed as a strategy to reduce cognitive dissonance and are not afraid that the counterfeit will not work properly.

factor and integrity may also be explored.

Consumers’ choices, infringements and market competition 333

The paper analyses competition between a genuine branded product and its counterfeits as a group and competition among the counterfeit goods.It derives long-run equilibrium output of the genuine product and the total output of counterfeits based on monopolistic competition among counterfeit producers.

relationship feeds into short-run equilibrium reduced form relations between outputs of the genuine and counterfeit goods and the demand parameters, the number of counterfeiters and public enforcement variables. Increased public enforcement reduces the number of counterfeiters and the total supply of counterfeit goods, while increasing the output of each active counterfeiter. Thus, increased public enforcement has the effect of

333 http://law.journalfeeds.com/economics/european-journal-of-law-and-economics/consumers%E2%80%99-choices-infringements-and-market-competition/20110216/ last accessed on March 8, 2012

raising the output and prices of the genuine goods.A higher degree of product differentiation between counterfeit varieties pushes the price of the individual counterfeit higher, pulls the output down and in turn brings about a larger market size for the genuine good. Increases in the differentiation thus strengthen the property right owner’s interest in protecting his property and motivate him to invest more in enforcement.

Further enforcement increase the apprehension rate and boost the expected compensation. On the other hand, bolstering the enforcement deters some of the counterfeit activities and consequently decreases the expected compensation. The both considerations have opposite effect on right owner’s private enforcement.A large part of the business of counterfeiting is directly involved in the usual exchanges between buyers and

goods but covers a diverse range of products.The greater the difference in the quality between the genuine good and the counterfeit varieties is, as perceived by consumers, the more the property right owner is willing to expend on the private enforcement. The difference

gives him an incentive to expend more resources to enforce his right. If the private enforcements are very costly, it is advised to implement lower country’s trade barriers to protect intellectual property rights. Furthermore, if the measures adopted to prevent the infringements of intellectual property rights increase the marginal cost of producing counterfeit goods, it can be predicted that the output of the individual counterfeiter will be reduced.

Background Document on Counterfeit Medicines in Asia,

The paper presents an overview of the counterfeit drug trade in Asia, with the aim to generate discussion about the necessary steps to understand and respond to this problem.

security risk. Drug counterfeiters not only defraud consumers, they also deny ill patients the therapies that can alleviate suffering and save lives. It raises concerns about lack of knowledge about its true prevalence, impact, existing intervention strategies and challenges, and other issues critical to developing evidence-based strategies to address it.

Health professionals have a crucial role to play in alerting patients to counterfeit medicines and detecting their presence.

rising drug costs, indifferent attitude towards counterfeiting by both Asian consumers and authorities are the main contributors to the scenario.Counterfeited drugs not only include life style drugs but also life-saving drugs. The productions of counterfeit medicines in Asia are evolving from small basement operations to manufacturing of industrial scale counterfeit medicines. Counterfeited drugs are discovered in the legal supply chain, that is, through licensed wholesalers and parallel traders. There is an increasing use of technology to mimic authentic drugs by copying their high tech foil packaging, imprinted markings and logos.Increasing access to the Internet coupled with new methods of advertising such as those on underground radio stations, newspapers and television have created new challenges for safeguarding medicines.

The laws enacted are weakly enforced due to a number of complicating factors such as poor public educational/ awareness campaigns, general poverty throughout the country, lack of trained drug inspectors and an inadequate budget to implement regular inspections.

334 http://www.whpa.org/Background_document_Counterfeit_Medicines_in_Asia.pdf accessed on March 2, 2012

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Counterfeiters also favour higher-priced drugs for conditions patients may be reluctant to reveal to their doctors.

some counterfeit life-style drugs the health effects on patients ha been described as inconvenient.

prevention drugs may end up getting sick when they believed they were protected. They may not recover from illness as quickly as they would have with legitimate drugs, or may not recover at all

complementary medicine is widespread, patients may turn instead to traditional or herbal medicine. Counterfeit or

New drug development may be required in response to “ineffective medicines”, which will be more expensive and will further disadvantage patients in developing countries.As an effect of counterfeit medicines there has been acceleration of new, drug-resistant strains of viruses, parasites and bacteria. Counterfeit medicines for infectious diseases containing too little or sub-therapeutic amounts of

Some of the economic impacts are loss of taxes for government, reduced public trust, reduced investment in the pharmaceutical industry. It also can severely affect the business of the manufacturer whose products are being

made in development of medicines, optimizing dosage, carrying out clinical trials, discussing policy change, and manufacturing medicines. The economic impact of counterfeiting however goes beyond simply losses of sales by the legitimate rights holders. Companies face downward price pressure by competing with counterfeiters which do not incur development and advertising costs.

counterfeits. The overall costs of public health and safety increase when they are threatened by dangerous counterfeit goods.There is no simple solution to the problem of counterfeit and several strategies have been implemented in Asia.

them.Selling counterfeit medicines and medical devices often operate outside of jurisdictional borders, creating greater obstacles to successful anti-counterfeiting enforcement. For this reason, international cooperation and coordination is essential to creating solutions for the pharmaceutical counterfeiting problem.

6. Consumer consideration of non-deceptive counterfeit goods: a contingency matrix approach, Sarah Hong

The paper explains how consumers’ considerations of non-deceptive counterfeits vary as a function of the

The study aims to helpeffective marketing strategies. These strategies mainly focus on the ways to discourage counterfeit buying through educational communication, trademark registration, protection strategies, and authority regulatory actions or else via the involvement of distribution channel members in counterfeit detection and policing.It examines effects of situational variation on the consumer’s consideration of a counterfeits option. It evaluates the

as cheap price, good bargains, well-known brands effect, etc.

requirement and consumption pattern.

335 Sarah Hong Xiao & Michael Nicholson (2011): Consumer consideration of nondeceptive counterfeit goods: a contingency matrix approach, The Service Industries Journal, 31:15, 2617-2631

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consideration of two types of non-deceptive counterfeits across eight different usage situations.

to be included in the consumer’s consideration set.

The usage situation affects whether non-deceptive counterfeits will be considered by a consumer.

counterfeit consideration.Two types of non-deceptive counterfeits are non-digital (designer fashion accessories, designer watch, and designer handbag) and digital (DVDs, software, and music).

provided similar functions and acceptable quality was easy to obtain and were accessible, was a necessary alternative, whether a trusted product and the counterfeiters who sold the product provided refund and exchange

‘fashionable’ or ‘knowledgeable’ impressions to others and had a bad reputation. The main managerial implication of this study is for marketing managers of genuine articles and anti-counterfeiting service providers who want to study consumers’ consideration sets of counterfeit goods. In some usage situations,

situation, non-deceptive counterfeits are less likely to be considered.

Consumers’ willingness to knowingly purchase counterfeit products,336

The main objective of this study is to investigate whether personality factors namely status consumption, materialism

purchase counterfeit luxury brands.

knowingly purchase counterfeit luxury brands. The study aims to measure how antecedents (personality variables- status consumption, materialism and integrity)

theories which are Theory of reasoned action (an individual’s voluntary behaviour is predicted by the attitude toward the behaviour in question and how it is assumed that other people would view them if the behaviour is

moral reasoning and competency (ethical dilemma)It uses a self-administered questionnaire seeking responses from Australian university students using convenience sampling in respect of consumer purchase decisions for a high involvement product category and a luxury symbolic brand – Tag Heuer dress watch to test following hypothesis:

A consumer’s likelihood of knowingly purchasing counterfeit luxury brands will be negatively related to his/her attitude toward the lawfulness and legality of purchasing counterfeit luxury brands which is in turn positively

counterfeit luxury brands and on consumer willingness to knowingly purchase counterfeit luxury brands which

A consumer’s likelihood of knowingly purchasing counterfeit luxury brands will be positively related to the expected performance and negatively related to the useful life of the counterfeit luxury brands relative to the genuine luxury brands.

Consumers with high integrity, honesty, politeness and responsibility have negative attitudes towards

336 www.emeraldinsight.com/1750-5933.htm last accessed on March 4,2012

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luxury brand not necessarily implying indicate moral laxity but on owing to it not seen as a serious offence compared to other illegal acts.

The availability of counterfeit luxury brands means consumers who previously could not afford the genuine article are now able to purchase an alternative. Status consumption was found to have no bearing on willingness to knowingly purchase counterfeit luxury brands.Consumer’s likelihood of knowingly purchasing counterfeit luxury brands will be negatively related to the useful life of the counterfeit luxury brands relative to its genuine luxury brands.There is an increase in consumer expectations of quality counterfeit products on account of several factors.

It is proposed to use integrity as a cue for developing effective strategies to curb the growth of the counterfeit

performance, after sales-service and life-time warranties of their products relative to a counterfeit variant.

The study demonstrates that the impact of price differentials on counterfeit purchases varies according to the

the price differential does not affect consumers’ purchase intentions towards the counterfeit. However, when the

to purchase the counterfeit product.

The study is conducted in the background of serious counterfeiting problems facing luxury brand marketers. It

This research assumes that normally law-abiding citizens may simply see nothing wrong with purchasing counterfeits because they perceive prices of designer products to be unfair to consumers. It suggests that consumers can be deterred from buying counterfeited replicas of a particular brand through

It tests the following hypothesis on the sample of university students by studying their responses for buying decision in respect of fake Calvin Klein perfume and fake rolex watch.

intention to buy the counterfeit products. Hence price is the main consideration for counterfeit demand.As the perceived quality difference (QD) between the original and the counterfeit product decreases, consumers’

and packaging used in the product, which are the cues that consumers most easily observe.

difference (QD) lowers purchase intentions when the price difference is high. Implying that when the price difference is high and the quality difference is negligible, preferences for the counterfeit reach their highest level; however, with a higher price difference and substantial quality difference, consumers would exhibit a comparatively lower

doi:10.1016/j.jbusres.2011.10.017, Journal of business research

preference for the counterfeit.

status and activities with respect to its perceived societal obligations”. This implies that in case a company is not displaying good corporate citizenship, consumers feel no need to support the company by purchasing its products.

The results of sample questionnaire testing on two products are:Individuals who saw a higher price differential between a counterfeit and a legitimate brand had greater intentions to buy the counterfeit.

The interaction between price differential and quality differential can be only seen in case of conspicuous

quality cannot be detected by others. Consumers would buy the cheap replica only if no one was likely to see that it was a fake.

an effect when price differences are higher.Thus it concludes two motives for counterfeit purchases that are distinct from product perceptions of economic value. First, consumers respond to higher price differential only if the companies have low perceived corporate

respond to higher price differential if others cannot determine whether the counterfeit product is a fake, allowing purchasers to show off their purchase. Thus it suggests that companies that suffer counterfeiting threats must not only reduce the price differentials

campaigns and the media.Further premium brands which cannot reduce prices should raise actual counterfeit prices by adding features that

to increase enforcement of existing intellectual property laws.

quality barriers to make fakes easy to spot. Doing so will prevent consumers from purchasing counterfeits that only offer high cost differences.Finally, research suggests that increasing competition worldwide and declining product prices prompt consumers to focus more on the fairness of their market transactions and not just on their economic outcomes.

Extending the EPC Network – The Potential of RFID in Anti- counterfeiting,

It claims that current techniques like holograms are not suited for automated tests of product authenticity and do not provide the required level of security.

RFID is a generic term for technologies that use radio waves to automatically identify objects. In the most basic

338 The Electronic Product Code (EPC) - A Naming Scheme for Physical Objects. White Paper, Auto-ID Labs, Massachusetts Institute of Technol-ogy, www.autoidlabs.com/whitepapers/MIT-AUTOID-WH-002.pdf [FDA04] U. S. Department of Health and Human Services, Food an - Staake, Thiesse, et al. - 2001

antenna together are called RFID transponder or RFID tag).In case of products requiring authentication mechanism beyond track and trace solution, paper suggests usage

enables sharing of RFID related data over internet.

about goods.

secure authentication functionalities.

micro-electronics though expensive uses sophisticated digital signatures and is suited for automated checks for

areas of future work.

Fighting strategies in a market with counterfeits,

The paper adapts standard vertical differentiation model and allow consumers the choices of purchasing an authentic product, purchasing a counterfeit, or not buying to suggest anti-counterfeiting strategies.

brand can be relatively more destructive to a small brand and may potentially enhance the competitiveness of a

A brand name company directly challenge counterfeiters only if it becomes too expensive to further improve the

authentic product and its counterfeit narrows. On the other hand, a counterfeit drives more consumers to make purchases and hence may have promotional effect on and enhance the popularity of an authentic product.It derives equilibrium anti-counterfeiting strategies in a market with two competing brand name products and a counterfeit under general conditions. In a two brand market, one brand name product can draw some consumers

counterfeit on the big brand is higher, the relative impact is lower than the small brand.

11. Study on Rapid Information exchange on counterfeiting and piracy.

The global explosion in counterfeiting and piracy has created one of the most serious problems facing world business.

The study provides an inventory and comparative assessment of existing and planned e-government initiatives at national and European level and an assessment of actual needs for administrative cooperation and information sharing on counterfeiting and piracy between administrative and operational enforcement agencies.Due to the nature of the information held by the law enforcing authorities, they are reluctant to share information with other law enforcement authorities. Therefore the information exchange systems currently available mostly cover only their own policy area, e.g. only customs, only police or only market surveillance, etc. Information exchange between these policy areas happen through ad-hoc requests to one another by fax and email. IT-based systems are mostly reserved to only one policy area.There are two groups of users of information exchange systems namely law enforcers consists of customs authorities, police, border police, public prosecutors, competent courts, anti-fraud authorities, consumer safety

339 http://www.ielm.ust.hk/dfaculty/hongl/ZhangHongZhangCounterfeit.pdf last accessed on March 8,2012340 http://ec.europa.eu/internal_market/iprenforcement/docs/study_information_en.pdf last accessed on September 7, 2012

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investigations and information originating from company or consumer complaints. The exchange is usually done on a case-by-case basis.

and piracy. The states do not have any policymaking documents on rapid information exchange or guidelines addressing intellectual property matters.

There are several concrete requirements to facilitate more effective rapid information exchange:Information exchange across borders and across policy areas to coordinate.Translation should be available.

More public private cooperation.Stronger authentication procedures.

Consumers should be able to contribute to the detection of counterfeits.Cooperation in the development of preventive measures.Statistical tools.

information exchange at levels of cross policy cooperation, cross border cooperation and for internal coordination within policy areas.There is vital need for more regular, effective and speedier exchange of information cross policy and cross border in multiple forms and languages between Member States’ enforcing authorities.

Standardised communication forms.Multilingual capabilities.

An information exchange platform for public and private cooperation.A search functions to identify the competent authority among users.

Database integration allowing users to search different databases through a single interface.

12. Voluntary Purchase of Counterfeit Products: Empirical Evidence From Four Countries ,

The paper develops a model of the antecedents and drivers of voluntary counterfeit purchases over a sample of

It tests the following hypothesis:The more negative consumers’ attitudes toward “big business” are, the stronger their intention to purchase counterfeits.

purchase counterfeits.The more positive the price/value relationship of counterfeits is perceived, the stronger the intention to purchase counterfeits.

341 Elfriede Penz, Bodo B. Schlegelmilch & Barbara Stöttinger (2008): Voluntary Purchase of Counterfeit Products: Empirical Evidence From Four Countries, Journal of International Consumer Marketing, 21:1, 67-84 available at http://dx.doi.org/10.1080/08961530802125456

The stronger the perceived embarrassment potential of counterfeits, the weaker the intention to purchase counterfeits.Readiness to take risks has a positive impact on the perceived price-/value relationship of counterfeits and readiness to take risks has a negative impact on the perceived embarrassment potential of counterfeit goods.Age, Education, income and more knowledge about negative effects have an effect on attitudes toward counterfeiting (on purchase intentions,

The Findings of the above research are:The perceived, favourable price/value relationship of counterfeits has a strong impact on the intention to purchase, except for Mexicans. This effect increases, as the price gap between original and fake product widens.

fake products showed only sporadic impact on the consumer buying decisions of fake.

products at all. Income has neither a direct nor an indirect effect on the intention to purchase. Neither of the other demographic variables, i.e., age nor education/knowledge have a direct effect on the intention to purchase counterfeits.Attitudes toward counterfeiting did not moderate the impact of the favourable price/value relationship on

general education may help to change their attitudes. It suggests changing the perceived price/value relationship of counterfeits among consumers. Effective means to reduce the perceived price differential between fakes and originals may involve both communication as well as product activities for instance copy protection measures or product returns.

Communication activities should more clearly and convincingly the downsides of the counterfeiters’ “business model.” making it harder for consumers to rationalize their behaviour and will take some focus away from the price advantage of counterfeits. The right holders may reduce the price of originals to address the concerns of some governmental institutions and consumer lobbyists who think that the high prices for luxury invite counterfeiters. It should be done with extra caution on account of irreversibility and may damage a brand’s image as a premium product.

13. Anti Counterfeiting Trade Agreement (ACTA),

The Anti-Counterfeiting Trade Agreement (‘ACTA’) is motivated by the perceived lack of progress of multilateral enforcement of intellectual property rights.

regional free trade agreements (FTAs).

Japan. Negotiating parties included: Australia, Canada, Japan, the Republic of Korea, Morocco, New Zealand,

ACTA are controversial both in terms of the process and the substance of the negotiations. It maintained secrecy

support for the treaty.

the actual scale and content of what was being achieved. There were also concerns related to; when documents would be made public; whether public interest groups had the same access as business and rightholder groups; what effect and relationship ACTA would have with

prerogatives to properly evaluate the treaty.There were concerns about the potential negative effect of ACTA on fundamental human freedoms and privacy; the possibility of requiring cut off of internet access to consumers that infringe the agreement; imposing liability on internet service providers that carry content that infringes the agreement; the potential negative effect of ACTA on access to medicines in Europe and in third countries.

due to the relatively modest scale of the outcome, as well as the fact that ACTA will not require any change in the

The primary area of concern is that of border measures, expansion to all forms of intellectual property, except

Directive.

not establish a consistent and workable framework for reading the two agreements together. Thus gaps in ACTA

Health.

infringements.

that its implementation will be.

implemented especially the border and criminal enforcement measures as well as the in-transit procedures.

Other Reports/ Papers:

1. A Comprehensive Examination Of Drug Regulatory Issues, Including The Problem Of Spurious Drugs,the Chairmanship Of Dr. R.A. Mashelkar

The study was conducted to examine all the aspects regarding the regulatory infrastructure and the extent and problem of spurious/substandard drugs in India. It makes several recommendations and a roadmap for implementation of the institutional and legal changes.It raises concerns about the state government implementation plans, infrastructural improvement in respect of

setting up of National Drug Authority.It attributes non-uniformity in the interpretation of the provisions of laws and their implementation and the varying

343 http://planningcommission.nic.in/reports/genrep/health/Final_Report_mashelkar.pdf last accessed on August 31, 2012

1. A Comprehensive Examination of Drug Regulatory Issues, Including the Problem Of Spurious Drugs, By Ministry Of Health And Family Welfare, Government Of India, November 2003. Expert Committee under the Chairmanship of Dr. R.A. Mashelkar.

2. Defense Industrial Base assessment: Counterfeit Electronics by US Department of Commerce

3. Intellectual Property Crime, By Dr. Sudhir Ravindran & S.A. Chenthil Kumaran IP Consultants with Altacit Global.

4. 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 Kroff & Ian Brown

Cosmetics Act in many states of India. It has attributed the problems in the regulatory system to inadequate or weak drug control infrastructure at the State and Central level, inadequate testing facilities, shortage of drug inspectors, non-uniformity of enforcement, lack of

information.It highlights the need for strengthening the existing organisations to enable them to undertake all the functions envisaged for NDA. A strong, well equipped and professionally managed CDSCO, which could be given the status of Central Drug Administration (CDA) has been envisaged. CDA would have the right to give licences for

Organizations by provision of additional personnel, with top class technical and investigative skills, appropriate infrastructure (drug testing laboratories) and adequate resources. Interstate exchange of information and regulatory

It has recommended for stricter punitive actions against manufacturers and distributors of spurious drugs with

or loss of life. It illuminates the need for speedy trial through designated courts of such offences by severe, sure and swift punishment. It provides the design of Central Drug Administration (CDA), its size, functions and the sharing of the responsibilities vis-à-vis the States including directions for licensing of manufacturing units by a central authority. It also deals with the regulatory health food/dietary supplements/therapeutic foods, Indian system of medicines and herbal

clinical research in India with special reference to the drug regulatory agency including modern biotechnology. It also recommends the creation of new categories of food for covering dietary supplements and functional foods.

methodology, extraction and preparation of market compounds etc in respect of new and existing drugs.Over the Counter Drugs list should be reviewed comprehensively on a periodical basis and scope to be broadened

marketing surveillance of imported as well as locally made medical devices.All the stakeholders in clinical research viz. investigators, sponsors, ethics committees as well as regulators should

and to achieve credibility for the data generated in India.It also lists suggestions in storage and distribution by restricting excessive concentration of retail/wholesale outlets. The drug manufacturers and wholesale/ retail distributors should follow good storage practices for their products during transport as well as their outlets.Further the study evaluates the extent of spurious and sub-standard drugs and recommends measures required to

which could give a realistic estimate of the menace of spurious drugs. The main recommendations are:Creation of effective interaction between the stakeholders i.e. industry and regulators, industry and consumers, trade and regulators and medical professional and regulators.

Discouragement of proliferation of drug distribution outlets.Making changes in law to provide enhanced penalties, making the offences cognisable and non-bailable in

Designation of special courts to try the cases of spurious drugs.

Creating effective networking system between States.Checking on drug supplies to practitioners who buy and supply drugs to their patients.

system.Creation of better surveillance system by the Trade Association on defaulting members and to take strict action against them.

Creation of better awareness amongst consumers.

drugs is located in a different state. It also recommends steps to be taken by the pharmaceutical industry and pharmacy association to tackle the problem of spurious drugs by formulating, streamlining and using their marketing network to identify distribution channel and persons involved in spurious drug trade and cooperating with the regulatory and/or police authorities.It also stipulates the use of mass awareness campaign to educate the consumers and the medical and paramedical professionals on the ways and means of detecting spurious drugs and the advantages of purchasing from licensed sources with valid cash memos.

The study completely rebuffs various media claims on the level of spurious drugs in the Indian pharmaceutical

2. Defense Industrial Base assessment: Counterfeit Electronics

counterfeit electronics.

and affecting weapon system reliability.

supply chains, to provide an understanding of industry and government practices that contribute to the problem, and to identify best practices and recommendations for handling and preventing counterfeit electronics.

and brokers, circuit board assemblers, prime contractors and subcontractors, and Department of Defense (DOD) agencies.

being counterfeited; practices employed in the procurement and management of electronic parts recordkeeping

counterfeits.This assessment focused on discrete electronic components, microcircuits, and circuit board products – key elements of electronic systems that support national security, industrial, andcommercial missions and operations.

electronics during the four-year study period. Moreover, information collected highlighted an increasing number of counterfeit incidents being detected, rising

The rise of counterfeit parts in the supply chain demonstrates weaknesses in inventory management, procurement procedures, recordkeeping, reporting practices, inspection and testing protocols, and communication within and across all industry and government organizations.

All elements of the supply chain have been directly impacted by counterfeit electronics.

Companies and organizations assume that others in the supply chain are testing parts.There is lack of traceability in the supply chain.

The recordkeeping on counterfeit incidents by organizations is very limited.

Stricter testing protocols and quality control practices for inventories are required.

September 7, 2012

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chain.

Implement procedures for detecting and reporting suspect electronic components.

Require part traceability when purchasing from independent distributors and brokers.Establish a list of trusted suppliers and untrusted supplier list to document questionable sources.

Adopt realistic schedules for procuring electronic components.Ensure physical destruction of all defective, damaged, and substandard parts.Expand use of authentication technologies by part manufacturers and/or their distributors.Screen and test parts to assure authenticity prior to placing components in inventory including returns and buy backs.

Strengthen part testing protocols to conform to the latest industry standards.Verify the integrity of test results provided by contract testing houses.

counterfeit parts for use by industry and all federal agencies.

3. Intellectual Property Crime, By Dr. Sudhir Ravindran & S.A. Chenthil Kumaran

It analyses the costs to the right holder and the legal protection relating to intellectual property crime while also providing the Indian perspective to the whole issue.

while piracy involves, wilful copyright infringement. These are very similar and often overlapping crimes.Main factors encouraging counterfeiting are lack of consumer awareness, advancement of technology, lax

Counterfeiter infringes any, or all, of the intellectual property rights, trade marks, patents, designs and copyrights.

and copyrights are monopolies, granted by law. A trade mark is not a monopoly. The proprietors of patents and

issue and companies that try to save money by not registering their rights run a great risk.India is perceived as not providing adequate intellectual property rights protection or enforcement of laws protecting

and collaborative approach on the part of the various stake holders in bringing about increased awareness amongst

345 ebookbrowse.com/6-intellectual-property-crime-pdf-d144821390 last accessed on March 21, 2012

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4. Opinion on the compatibility of the Anti-Counterfeiting Trade Agreement (ACTA) with European Convention on Human Rights & the EU Charter of Fundamental Rights,

The Anti-Counterfeiting Trade Agreement (ACTA) covers counterfeit trademark goods and pirated copyright goods, including those distributed online, and require criminal penalties for wilful infringement on a commercial scale.

It is governed by a new “ACTA committee” through which signatories may amend the agreement, with industry consultation but no requirement for public input.

penalties against people using copyright circumvention technologies and those accused of copyright infringements,

These provisions are potentially offering limited protections for access to knowledge, information and culture in the public interest. There are also concerns that ACTA is not merely seeking to bind the negotiating states, but is also creating a new international standard which is likely to be imposed on third countries in future trade agreements.

developing nations in international trade relations; spur innovation and support small business; promote grassroots culture; and enhance human rights to expression and knowledge for people across the world.It claims that ACTA was negotiated in unwarranted secrecy, without adequate input from civil society or

hampers innovation; fails to promote grassroots culture; and could impede the dissemination of knowledge for people across the world (and access to health care and generic medicines).

right to freedom of expression and information, right to protection of personal data and fair trial/due process issues related to other fundamental rights.

346 http://act-on-acta.eu/Opinion_on_the_compatibility_of_ACTA_with_the_ECHR_and_the_EU_Charter_of_Fundamental_Rights last accessed on September 4, 2012

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1. Legal Metrology (Packed Commodities) Rules, 2011

or meant for industrial consumers or institutional consumers.

markings of “when packed”)

of usable sheets

in Hindi or English.

commodities till complete declarations are made.

quantity declared.

in the package.

provisions of Drug and Cosmetic Rules shall be applicable. There are certain exceptions to these provisions in case of sale of bidi, incense sticks, gas cylinder and in case of packing material over or under utilised in a particular month.

2. Trade Marks Act

the prevention of the use of fraudulent marks.

material and mode of manufacture.

format.

religious sentiments; or scandalous / obscene; or with prohibitive usage.

debarred by law or copy rights act except in case of honest concurrent use or special circumstances.

registered as trade marks.

consent of the living person or the legal representative of the deceased person is required to be furnished.

register the whole and the part as separate trade mark.

trade mark of the same proprietor in respect of the same/ similar goods.

be advertised either before or after acceptance to afford the public an opportunity to oppose within three months from the date of advertisement.

been completed (application accepted and not opposed or opposition dismissed).

connected with all the joint applicants.

and conditions.

be valid for one year for the purposes of any new trade mark application received.

case goods or services are sold as pass offs.

proprietor such as to cause confusion as being/ associated with genuine goods; or take unfair advantage contrary to honest practices in industrial or commercial matters.

outside the scope/ conditions/ limitations of registration; or when registered owner has given an implied consent; or is used in relation to parts and accessories of the goods being necessary; or it pertains to the use of registered trade mark which is identical or similar to another trade mark registered.

multiple assignment/ transmission causing confusion; or associated trade mark which can be assigned as a whole.

provided that it will be assigned to a company being incorporated or would be used post registration.

as laid by the Registrar provided there is a clear agreement on terms and conditions of usage.

agreement; or non-disclosure of material facts by the proprietor/user; or quality stipulation of goods is not enforced or; there is change in circumstances since registration after giving notice and opportunity of hearing.

proving proprietors’ consent shall be for the accused.

uses any instrument for the purpose of falsifying; or applies false indication of country, place, name or address of the manufacturer; or tempers with effaces an indication of origin; is punishable with imprisonment for six months to

penalty can also be levied on any person who sells, lets for hire or has in possession of such goods or things.

in the register. The courts can also direct forfeiture of goods in respect of which an offence has been committed.

136

3. Patent Act, 1970,

formulation of an abstract theory; or mere discovery of a new form of a known substance not resulting in enhancement

or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.

properties of the components thereof or a process for producing such substance; or the mere arrangement or re-arrangement or duplication of known devices each functioning independently of one another in a known way; or a method of agriculture or horticulture; or any process for the medicinal, surgical, curative, prophylactic or other treatment of human beings or any process; or plants and animals in whole or any part thereof other than micro-organisms but including seeds, varieties and species and essentially biological processes for production or propagation of plants and animals; or a mathematical or business method or a computer programme per se or algorithms; or a literary, dramatic, musical or artistic work or any other aesthetic creation whatsoever including cinematographic works and television productions; or a mere scheme or rule or method of performing mental act or method of playing game; or a presentation of information or topography of integrated circuits; or in relation to atomic energy.

technical information, source and geographical origin of the biological material used in invention etc.

and rights as if a patent for the invention has been granted but does not enjoy the right of infringement.

deemed to have been abandoned.

published before the priority date of claim; or invention was publicly known or used in India before the priority date of that claim; or invention claimed does not involve any inventive step; or is not an invention within the meaning of

or in case of incomplete or fraudulent disclosure; or the claimed invention is anticipated having regard to the knowledge available in India.

obtained; or invention has been published before the claim’s priority date; or it was publicly known or used; or invention is obvious and does not involve inventive step; or is not patentable; or invention or the performance

geographical origin of biological material used for the invention; or it is an anticipated invention with regard to available knowledge.

contravention of this provision, the application for patent under the Act in India shall be deemed to be abandoned.

publication of application.

process. A patent rights is not infringed when it is used on foreign vessels, temporarily or accidentally in India

patent or permit only part grant of permit.

4. Drug and Cosmetic Act, 1940

mitigation, or prevention of any disease or animal; cosmetics; components of a drug and devices used for treatment/ diagnosis/ treatment of diseases.

prohibits the manufacture for sale or for distribution, or sell, or stock or exhibit or offer for sale, or distribution of any drug/ cosmetic which is not of a standard quality, or is misbranded, adulterated or spurious.

the damage is concealed; not labelled in prescribed manner; false/ misleading statement.

harmful/ toxic substance; or stored under insanitary conditions; or its container is composed; or is mixed with any substance to reduce its quality and strength such that the drug may be rendered injurious to health.

of, or is a substitute for another drug or resembles another drug in a manner likely to deceive the user or has a misleading label as to the name of the manufacturer.

manner; or contains false/ misleading label or makes a false/ misleading statement.

imitation, or a substitute of another cosmetic or resembles another cosmetic in a manner likely to deceive or has a misleading label as to the name of the manufacturer.

The Act further restricts the manufacture, sale or distribution of:Drugs without displaying the formula or list of ingredientsDrug containing a statement as to prevent/ mitigate o cure any diseaseCosmetic containing unsafe/ harmful ingredients Drugs/ cosmetics sold in contravention of licence

aggrieved person or by a recognised consumer association.

drugs which can be imported only under licence.

spurious, prohibited in original country, patent/ propriety medicines where true formula is not disclosed, risky, post expiry date and not labelled/ packed in prescribed manner

5. The Prevention Of Food Adulteration Act,

of adulteration of food stuff and to bring uniformity in laws.

health.

causes.

or preparer and send it for testing.

licenced (in case of mandatory licence requirement) food item.

term under Indian penal code.

published in a local newspaper.

conditions for the manufacture, sale, distribution and storage of food. It lays down conditions for maintenance of the manufacturing premises in a sanitary condition and maintenance of the healthy state of human beings associated with the production, distribution and sale.

ningcommission.nic.in/reports/genrep/health/Final_Report_mashelkar.pdf

ba_indian_pharmaceutical_market_research

Medicines_in_Asia.pdf

Counterfeit_Medicines_in_Asia.pdf

pdf

Single Market, Final report for the European Commission, http://ec.europa.eu/internal_market/indprop/docs/piracy/

en/ipr_enforcement/customs_handbook/2_impact_on_counterfeiting_and_piracy.pdf

ing motives for purchasing counterfeit products, J

fsheet.doc

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61 http://www.allindiantaxes.com/vat.php

63 http://www.articlesbase.com/home-brewing-articles/global-anti-counterfeit-packaging-technologies-market-for-food-

113 Study on Rapid Information exchange on counterfeiting and piracy, http://ec.europa.eu/internal_market/iprenforce ment/docs/study_information_en.pdf

Abbreviation Description

ACMA Automotive Components Manufacturers Association

ACTA Anti-Counterfeiting Trade Agreement

ANSI American National Standards Institute

ASI Annual Survey of Industries

ASSOCHAM Associated Chambers of Commerce and Industry in India

BASCAP Business Action to Stop Counterfeiting and Piracy

BII Foreign liquor bottled in India

BIO Foreign liquor bottled in origin

CAG Comptroller Auditor General

CAGR Compounded Annual Growth Rate

CASCADE Committee Against Smuggling and Counterfeiting Activities Destroying the Economy

CDSCO Central Drugs Standard Control Organisation

CEBR Centre for Business and Economics Research

CIABC Confederation of Indian Alcoholic Beverage Companies

CPSC Consumer Product Safety Commission

CSO Central Statistical Organisation

CST Central Sales tax

CV Commercial Vehicle

DGCIS Directorate General of Commercial Intelligence

EU European Union

FDA Food and Drug Administration, USA

FDI Foreign Direct Investment

FICCI Federation of Indian Chambers of Commerce and Industry

FMCG Fast moving consumer goods

GACG Global Anti-Counterfeiting Group

GAO

GST Goods and Services Tax

GSV Gross Sales Value

HS harmonic system

IACC International Anti-Counterfeiting Coalition

ICC International Chamber of Commerce

ICRA Investment Information And Credit Rating Agency of India

IMFL Indian made foreign liquor

IP Intellectual Property

IT Information Technology

MNC Multinational Company

MoSPI Ministry of Statistics and Programme Implementation

MPCE Monthly Per Capita Expenditure

MSME Micro, Small and Medium Enterprises

MSME Ministry of Micro, Small and Medium Enterprises

NCIPC National Centre for Injury Prevention and Control

NIC

NIMHANS National Institute of Mental Health and Neurosciences

NSS National Sample Survey

NSSO National Sample Survey Organisation

OECD Organisation for Economic Co-operation and Development

OEM Original Manufacturers

PBT

RFID

TRIP Trade-related Aspects on Intellectual Property Rights

UPS Uninterrupted Power Supply

VAT Value Added Tax

WCO World Customs Organization

WHO World Health Organisation

WIPO World Intellectual Property Organisation

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