‘It is a cause for concern that most countries regularly raise taxes on tobacco products to make them less affordable, but India has not done so’ | Photo credit: Getty Images/iStockphoto
Adam Smith argued in his famous work The Wealth of Nations that goods such as sugar, rum, and tobacco, although not essential to life, are widely consumed, and thus good candidates for taxation. Research in India and around the world supports the use of taxes to regulate tobacco consumption. In India, however, tobacco taxes have not increased significantly since the introduction of the Goods and Services Tax (GST) five years ago, making these products increasingly cheaper, according to recent studies.
In 2017, the economic burden and health care costs due to tobacco use and exposure to second-hand smoke amounted to ₹2,340 billion, or 1.4% of GDP, while India’s average annual tobacco tax revenue was only ₹537.5 billion. Despite the government’s goal of making India a $5 trillion economy, the growing affordability of tobacco threatens this vision and could hurt GDP growth. Tobacco use is also the cause of about 3,500 deaths per day in India, which negatively affects human capital and GDP growth.
The matter is related to the tax system
The current GST system for tobacco taxation in India has features that hinder efforts to regulate consumption. One issue is the excessive use of ad valorem taxes, which are not effective in reducing consumption. Many countries use specific or mixed tax systems for harmful products. The GST system in India relies more on ad valorem taxes than the pre-GST system, which mainly used specific excise taxes. Many countries with a GST or Value Added Tax (VAT) also impose an excise duty on tobacco products. In India, the share of central excise duty in total tobacco taxes increased from pre-GST to post-GST for cigarettes (54% to 8%), bidis (17% to 1%), and smokeless tobacco (59% to 11%). has reduced considerably. , A substantial portion of the compensation cess as well as the National Calamity Contingency Duty, or NCCD (it is levied as excise duty on certain manufactured goods specified under the Seventh Schedule to the Finance Act, 2001) are currently applicable to tobacco products . , If specific taxes are not revised regularly to adjust for inflation, they lose their value. Inflation indexing should be made mandatory for any specific tax rates applicable to tobacco products.
Discrepancies in Excise Taxation
There is a large discrepancy in taxation between tobacco products. Despite cigarettes accounting for only 15% of tobacco users, they generate 80% or more of tobacco taxes. There are low taxes on bidi and smokeless tobacco, which encourages consumption. Taxes on all tobacco products should be made more consistent, as none are more or less harmful than the other. Protecting public health should be the main principle behind tobacco taxation. Notably, bidis are the only tobacco product without compensation cess under GST, despite being as harmful as cigarettes. There is no public health rationale for the lack of cess on bidis. The current six-tier tax structure for cigarettes is complex and creates opportunities for cigarette companies to legally evade taxes by manipulating cigarette lengths and filters for brands with similar names. Instead, the tier system should be abolished or reduced to two tiers, which can be phased out to a single tier over time.
The GST rate on certain smokeless tobacco ingredients like tobacco leaves, tendu leaves, betel leaves, supari etc. is either nil or 5%-18% GST. It is important that all products used exclusively for making tobacco are brought under the uniform 28% GST slab. This will generate the right public health message – that all tobacco products are bad and their consumption needs to be discouraged.
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Smokeless tobacco products in India are taxed ineffectively due to their small retail pack size (often 1/2 gram or less), which keeps prices low. In order to standardize and increase the retail price, mandatory standardized packing for smokeless tobacco pouches (at least 50 gm-100 gm) should be implemented. This would also make it easier to implement graphic health warnings on packaging.
GST currently exempts small businesses with an annual turnover of less than Rs 40 lakh. Many smokeless tobacco and bidi manufacturers operate in the informal sector, which lowers the tax base on these products. While these exemptions are intended to protect small businesses, public health arguments require that they not be extended to businesses that produce or distribute tobacco products. Therefore, conditions should be imposed on these exemptions so that tobacco traders do not benefit from them.
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Prior to GST, taxing tobacco was a way for state governments to raise revenue and control consumption. For example, Rajasthan had a 65% VAT on tobacco products. After GST, states can no longer raise taxes on tobacco, which hinders their ability to raise revenue and regulate consumption. While a uniform tax across the country is good, not increasing it nationally at regular intervals harms public health.
It is a cause for concern that while most countries regularly increase taxes on tobacco products to make them less affordable, India has not increased taxes on any tobacco products in five years. This could undo the progress seen in the 17% reduction in tobacco use from 2009-10 to 2016-17. Both the GST Council and the Union Budget should take the opportunity to significantly increase taxes on all tobacco products, including bidis, cigarettes and smokeless tobacco, through hikes in excise duty or compensation cess.
Rijo M. John is a health economist and assistant professor at Rajagiri College of Social Sciences, Kochi, Kerala