Tax on Tobacco Products
Context:
- Adam Smith asserted in his well-known book The Wealth of Nations that commodities like sugar, rum, and tobacco are widely consumed and are hence appropriate for taxes even though they are not necessary for existence. Studies from India and other nations support the use of levies to reduce tobacco use.
Pricing of tobacco products in India:
- However, since the Goods and Services Tax (GST) was imposed in India more than five years ago, the country’s cigarette prices have not increased significantly, making these products increasingly more widely available.
- Although India only collects 537.5 billion in tobacco taxes annually on average, the economic toll and medical expenses related to tobacco use and secondhand smoke exposure was 2,340 billion in 2017, or 1.4% of GDP.
- Despite the government’s desire to build India’s economy to $5 trillion, this objective is threatened by the growing accessibility of tobacco and may have a detrimental effect on GDP growth. Additionally, smoking-related mortality in India might reach 3,500 per day, which has a negative impact on GDP growth and human capital.
The issues with the tax system:
- There are aspects of the GST system that govern tobacco taxes in India at the moment that make it challenging to limit use.
- The Goods and Services Tax (GST), a value-added tax, is levied on the majority of goods and services that are offered for domestic use. Consumers are responsible for paying the GST, but it must be paid to the government by the companies who offer the goods and services.
- The 101st Constitutional Amendment Act of 2016 brought in GST to India. States now have the power to impose taxes on goods and services thanks to the addition of Article 246A.
- A central GST to cover excise duty, service tax, etc.; a state GST to cover VAT, luxury tax, etc. were the three various versions of GST that were adopted. The integrated GST will apply to interstate trade. The IGST is not a tax in and of itself; rather, it is a mechanism for harmonising state and union taxes.
- Additionally, Article 279A was introduced, which requires the President to designate a GST Council to manage and supervise the tax. Its chairman is the Union Finance Minister of India, while its members are state government-selected ministers. The way the council is set up gives the states a 2/3 majority and the centre a 1/3 majority. Making a decision requires a 3/4ths majority.
Absurdly high ad valorem taxes:
- To decrease consumption, these are ineffective. Numerous countries levy separate or combined taxes on dangerous goods. The GST system in India lays more emphasis on ad valorem taxes than the previous system did, which predominately used specific excise taxes. Many countries that apply a GST or VAT also tax tobacco products with an excise tax.
- A significant amount of the compensation cess and the National Calamity Contingent Duty, or NCCD, are currently levied on cigarette goods (it is imposed as an excise duty on certain manufactured commodities listed under the Seventh Schedule of the Finance Act, 2001). If certain taxes are not frequently adjusted to account for inflation, they lose their value. Any specific tax rates imposed on tobacco products should be indexed for inflation.
Variations in how commodities are taxed:
- Even though cigarettes make up 80% or more of tobacco taxes, only 15% of smokers are actual smokers. The use of bidis and smokeless tobacco is encouraged by low tariffs. No cigarette product is more or less hazardous than the others, hence taxes on all tobacco products ought to be applied more consistently. Taxes on tobacco should be based on preserving public health.
- Bidis are the only tobacco products immune from a compensatory cess under the GST, despite being just as lethal as cigarettes. There is no link between the lack of a cess on bidis and public health.
- The intricate, six-tiered cigarette tax system that now exists gives cigarette companies the chance to legally avoid taxes by altering the lengths and filters of cigarettes for brands with the same names. A two-tiered structure that can eventually be eliminated to form a single tier should take the place of the current tiered system.
- The GST rate varies for some ingredients used to create smokeless tobacco, including tobacco leaves, tendu leaves, betel leaves, areca nuts, etc., from 0% to 5% to 18%. It is essential to place all items in the same 28% GST rate that are used exclusively in the manufacturing of tobacco. By doing this, the right public health message—that consuming tobacco products is dangerous and ought to be avoided—will be communicated.
- Due to the small retail pack size (usually 1/2 gramme or less), smokeless tobacco products are not effectively taxed in India. To standardise and increase the retail price, mandatory standardised packaging for smokeless tobacco pouches needs to be implemented (at least 50 g-100 g). This will also make it easy to provide illustrative health warnings on packaging.
Exemptions for small businesses:
- Small businesses are now exempt from the GST if their yearly sales are under 40 lakh. Many makers of bidi and smokeless tobacco are found in the unofficial sector, which reduces their tax bases.
- Despite the fact that these exceptions are intended to protect small businesses, the public health argument requires that they not be applied to companies who produce or distribute tobacco products. Therefore, limitations should be imposed on these exemptions to stop cigarette manufacturers from abusing them.
The production of state income
- Prior to the GST, state governments could increase revenue and reduce consumption by taxing cigarettes. For instance, in Rajasthan, tobacco products were subject to a 65% VAT. Because of GST, states are unable to raise tobacco taxes, which restricts their ability to collect revenue and regulate usage. Even if a single, universal national tax is advantageous, the public’s health will suffer if it is not routinely increased at the federal level.
Conclusion:
- India hasn’t increased tobacco product levies in over five years, which is concerning because most countries often do so to make the products more expensive. The improvements obtained during the 17% drop in cigarette use from 2009–10 to 2016–17 may be significantly undone by this.
- The GST Council and the Union Budget should both take advantage of the opportunity to significantly boost taxes on all tobacco products, including bidis, cigarettes, and smokeless tobacco, through increases in excise charges or compensating cess.
