Tobacco taxes: Not enough done
Dr Monika Arora, March 1, 2016, DHNS 23:38 IST
Globally, fiscal policies have proved that the simplest and most cost-effective way of reducing demand of tobacco is by elevating prices of tobacco products through taxation. The World Health Organisation (WHO) recommends price and tax measures as an effective and important means of reducing tobacco use and many countries have successfully reduced the demand for cigarettes by imposing ‘sin tax’ on tobacco products and increasing their prices.
Tobacco taxation also helps generate government revenue. Tobacco excise taxes are particularly important because they can significantly raise final consumer price and make tobacco products unaffordable. Young people and those from lower socio-economic strata are more responsive to such price rises.
However, the Union Budget of 2016 proposes a meagre 10-15% increase on excise duty of tobacco products, excluding beedis. In fact, this is the third Budget in a row which has not made any increase of excise tax on beedis. The total excise includes: Basic Excise Duty, National Calamity Contingent Duty and Health Cess (Additional Excise Duty). This proposed 10% increase applies only to the Additional Excise Duty, which is the smallest component contributing to total excise.
So, the actual price of cigarettes and other tobacco products would not substantially increase, thereby having little public health benefit. Cigarette companies in India may argue that they have been tormented with higher excise year on year, but this year’s budget has failed to adopt the ‘sin tax’ argument where additional tax is concerned. This budget fails to take full advantage of the benefits of taxing tobacco, which kills one million Indians every year.
India has more beedi and smokeless tobacco users than cigarette smokers. The beedi here is very lowly taxed at 3 paise per stick for machine-made and 1.2 paise for man-mad ones. The low tax rate has resulted in an appallingly low level of total tax burden at about 20% of the retail price in 2012-13. Besides the low tax rate, tax exemptions provided to beedi manufacturers producing less than 2 million beedi sticks per year from paying any tax, complicates the situation.
This provision effectively transforms beedi manufacturing into thousands of small scale manufacturing units, enabling more than 90% of its producers to avail the exemption. The argument of exempting beedis from tax proposal does not hold good from a public health perspective and renders poor consumers even more vulnerable.
No doubt, India’s tax structure is complex with multiple tiers and differential treatment to different types of tobacco products. In fact, the WHO reported in 2015, that India is among 37 countries globally that use complicated and tiered tax measures on tobacco products, leading to greater variability of prices.
A multi-tiered excise tax system allows a freehand to producers to manipulate tax increments and enable substitution for consumers, in case of price rise. Studies in India corroborate the WHO’s observation that tobacco products in the country have increasingly become more affordable.
A recent study, Tobacco Taxes in India: An Empirical Analysis, commissioned by the Health Ministry and the WHO, argues that all tobacco products including cigarettes have become affordable due to higher increase in per capita incomes than the prices of tobacco products during 2006-07 to 2012-13.
Although the specific tax rates have risen in absolute terms during the period, once adjusted for inflation these tax increases are not resulting in a real increase, according to the study. The relative price indices of tobacco products are lower than the food products. This report also found that total tax (excise+VAT) burden, which express total tobacco tax as a share of retail price, is 58% in India while the recommended rate by the WHO is 70% only for excise tax.
The current raise in excise duty on cigarettes will increase price at snail’s pace. This will neither help achieve the health goal of reduced tobacco consumption nor satisfy the government’s revenue generation objective. In order to check the growing menace of tobacco, the government should stop differential tax treatment of tobacco products, which benefits the industry at the cost of the nation’s health.
The proposed Goods and Services Tax (GST) regime, which is supposed to minimise the anomalies in tax structure should consider uniformly taxing all tobacco products at a high rate to protect all Indians from the terrible consequences of tobacco use.
(The writer is Director, Health Promotion Division, and Associate Professor, Public Health Foundation of India)