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30th January 2023 (6 Topics)

Tax on tobacco products

Context

The GST system for tobacco taxation is hindering efforts in regulating consumption and protecting public health.

Taxation of tobacco products in India:

  • Sugar, rum and tobacco are widely consumed and is a good candidates for taxation.
  • However, research in India has shown that tobacco taxes have not increased significantly since the implementation of the Goods and Services Taxation (GST) over five years ago.
  • Despite cigarettes accounting for only 15% of tobacco users, they generate 80% or more of tobacco taxes.
  • In India, the share of central excise duty in total tobacco taxes decreased substantially from pre-GST to post-GST for;
    • Cigarettes (54% to 8%),
    • Bidis (17% to 1%), and
    • Smokeless tobacco (59% to 11%).
  • A large part of the compensation cess as well as the National Calamity Contingent Duty (NCCD), currently applied to tobacco products is specific.

NCCD is levied as a duty of excise on certain manufactured goods specified under the Seventh Schedule of the Finance Act, 2001.

GST regime for tobacco:

  • The GST rates on certain smokeless tobacco ingredients such as tobacco leaves, tendu leaves, betel leaves, areca nuts, etc. have either zero or 5%-18% GST. 
  • The current six-tiered tax structure for cigarettes is complex and creates opportunities for cigarette companies to avoid taxes legally by manipulating cigarette lengths and filters for similarly named brands.
  • Smokeless tobacco products in India are taxed ineffectively due to their small retail pack size (often 1/2 gram or less) which keeps the price low. 

Why do tobacco products have fewer taxes?

  • Tobacco manufacturers in the informal sector: Many smokeless tobacco and bidi manufacturers operate in the informal sector, which reduces the tax base on these products.
    • While these exemptions are intended to protect small businesses, the public health rationale requires that they not be extended to businesses that produce or distribute tobacco products.
  • End to the monopoly of States: After GST, States can no longer raise taxes on tobacco, which hinders their ability to increase revenue and regulate consumption.
    • While a uniform tax across the country is good, not increasing it at the national level at regular intervals harms public health.

Concerns:

  • Increasing Health issues: Despite the government’s goal of making India a $5 trillion economy, the increasing affordability of tobacco poses a threat to this vision and could harm GDP growth.
    • Bidis and smokeless tobacco have low taxes, encouraging consumption.
    • Tobacco use is also the cause of nearly 3,500 deaths in India every day, which impacts human capital and GDP growth in a negative way.
  • Increasing economic burden of government: In 2017, the economic burden and health-care expenses due to tobacco use and second-hand smoke exposure amounted to Rs 2,340 billion, or 1.4% of GDP.

Suggestions:

  • To standardise and increase the retail price, mandatory standardised packing should be implemented for smokeless tobacco pouches (at least 50 g-100 g).
  • Inflation indexing should be made mandatory for any specific tax rates applied to tobacco products.
  • 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 duties or compensation cess.
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