Daily Editorial Analysis for 30th January 2023

Revisit the tax treatment of tobacco products

Context

In India, tobacco taxes have not increased significantly since the implementation of the Goods and Services Taxation (GST) over five years ago, making these products increasingly affordable, as recent studies show.

Key Points

• In 2017, the economic burden and health care expenses due to tobacco use and second hand smoke exposure amounted to ₹2,340 billion, or 1.4% of GDP while India’s average annual tobacco tax revenue stands at only ₹537.5 billion.
• 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.
• Tobacco use is also the cause for nearly 3,500 deaths in India every day, which impacts human capital and GDP growth in a negative way.
• In India, the share of central excise duty in total tobacco taxes decreased substantially from pre­-GST to post­GST for cigarettes (54% to 8%), bidis (17% to 1%), and smokeless tobacco (59% to 11%).

Status of Tobacco Consumption in India

• According to the Global Youth Tobacco Survey, India has the second largest number (268 million) of tobacco users in the world and of these 13 lakh die every year from tobacco-related diseases.
• Ten lakh deaths are due to smoking, with over 2,00,000 due to second-hand smoke exposure, and over 35,000 are due to smokeless tobacco use.
• About 27 crore people above the age of 15 years and 8.5% of school-going children in the age group 13-15 years use tobacco in some form in India.
• India bears an annual economic burden of over ₹1,77,340 crore on account of tobacco use.
• Tobacco use is known to be a major risk factor for several non-communicable diseases such as cancer, cardiovascular disease, diabetes, and chronic lung diseases. Nearly 27% of all cancers in India are due to tobacco usage.

Taxation Scenario of Tobacco in India

• Ever since the introduction of the Goods and Services Tax (GST) legislation in 2017, there has been no significant tax increase on any tobacco product.
• There was only a minor increase in the National Calamity Contingent Duty (NCCD) during the Union Budget 2020-21 which only had the effect of increasing cigarette prices by roughly 5%.
• The Union Budget 2022-23 was an excellent but lost opportunity for the Government of India to buck this trend and significantly increase either excise duties or NCCDs.
• No significant tax increase on any tobacco product for four years in a row has made all tobacco products increasingly more affordable.
• More affordable tobacco products could attract new users especially among the youth.
• It would also mean foregone tax revenues for the Government especially at a time when the Government of India is looking forward to increasing the share of public spending on health.

What are the issues with Tobacco Tax ?

• Overuse of ad valorem taxes, which are not effective in reducing consumption.
• GST system in India relies more on ad valorem taxes than the pre­GST system, which primarily used specific excise taxes.
• A large part of the compensation cess as well as the National Calamity Contingent Duty, or NCCD (it is levied as a duty of excise on certain manufactured goods specified under the Seventh Schedule of the Finance Act, 2001) currently applied on tobacco products is specific.
• If specific taxes are not revised regularly to adjust for the inflation, they lose their value.
• Lack of a cess on bidis has no public health rationale.

Discrepancies in Taxation System

• Cigarettes accounting for only 15% of tobacco users, they generate 80% or more of tobacco taxes.
• Bidis and smokeless tobacco have low taxes, encouraging consumption.
• 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.
• 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
• 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.
• GST currently exempts small businesses with less than ₹40 lakh annual turnover.
• Many smokeless tobacco and bidi manufacturers operate in the informal sector, which reduces the tax base on these products.
• After GST, States can no longer raise taxes on tobacco, which hinders their ability to increase revenue and regulate consumption.

Way Forward

• GST system in India relies more on ad valorem taxes than the pre­GST system, which primarily used specific excise taxes.
• Inflation indexing should be made mandatory for any specific tax rates applied on tobacco products.
• Bidis and smokeless tobacco have low taxes, encouraging consumption.
• The main principle behind tobacco taxation should be in protecting public health.
• Notably, bidis are the only tobacco products without a compensation cess under GST, despite being just as harmful as cigarettes.
• The tiered system should be eliminated or reduced to two tiers, which can then be phased out over time to have a single tier.
• It is important that all products that are exclusively used for tobacco making are brought under the uniform 28% GST slab.
• To standardise and increase the retail price, mandatory standardised packing should be implemented for smokeless tobacco pouches (at least 50 g­100 g).
• This will also make it easier to implement graphic health warnings on the packaging.
• conditions should be imposed on small businesses exemptions so that tobacco businesses do not benefit from them.

Conclusion

GST Council meetings must strive to keep public health ahead of the interests of the tobacco industry and significantly increase either the GST rates or the GST compensation cess rates applied on all tobacco products.The aim should be to arrest the increasing affordability of tobacco products in India and also rationalise tobacco taxation under the GST.