Urgent need to rationalise tobacco tax

It is a universally accepted medical fact that tobacco and its products are injurious to health. But mere statutory warning does not bring control and economic instruments sure help in such situations. Rationalising the tax regime is one of the most effective policy regimes. The current rate of taxation has not raised the prices of tobacco products like cigarettes, bidis and chewing tobacco has not been sufficiently deterrent and hence the impact is negligible on demand as also the supply of the products. Even in the GST regime, there hasn't been any significant hike in tobacco product taxes.

In the budget of 2022-23, the government could have raised the excise duty on tobacco products and used the additional revenue to improve public health and build an alternative livelihood for people dependent on tobacco. A nominal hike could have sent a clear message that the government is serious about reducing tobacco consumption by making them less affordable. However, the government missed the opportunity, not only to mop up more revenue but also to reduce tobacco consumption and the damage it can cause to the health of people.

Tobacco tax not adjusted for inflation

Tobacco industry is a huge profit-making business with the least concern about the impact on public health. Beginning with the production up to the sale, tobacco has been an attractive business for those engaged in it. Commencing at the threshold of production, tobacco is a very remunerative crop that requires less labor and provides significantly large profits compared with the competing crops. Over years the Tobacco taxes in India are not adjusted to inflation and hence their affordability in the price adjusted to inflation increased over years. This has made all tobacco products highly affordable over time. Ever since the introduction of the GST regime in 2017, the Wholesale Price Index (WPI) of many commodities has gone up. The WPI of kerosene has witnessed a jump of 300%, petrol by 126%, LPG by 111%, fruits and vegetables by 30%, and meat and egg by 29%, while the WPI on cigarettes witnessed a meager 16% jump making it more affordable in relative terms.

World Health Organisation on tobacco taxes

According to the World Health Organisation (WHO) raising the price of tobacco products through tax hikes is the most effective economic policy instrument to curb tobacco use. WHO recommends a tax burden of at least 75 percent of the retail price for all tobacco products. Tobacco in India is taxed under GST (28%), a compensation cess, National Calamity Contingent Duty (NCCD) and Central Excise duty are also added. Even after adding all, the total taxes come only to 52% for cigarettes, 22% on bidis and 64% on smokeless tobacco. This is far short of the recommendation given by WHO and not adhering to the WHO norms. Not utilizing the opportunity to increase excise duty on tobacco products, has significant negative fallouts besides uncontrolled consumption of tobacco products, it also ignores a potential revenue-realizing source.

Tax hike does not fuel illicit sale

One of the important arguments against the 'tax hike' is that it will provoke the illicit trade of products. A hike in tax is not the main catalyst to fuel illicit sales. Another argument put forward by the tobacco industry is the employment loss in the bidi and cigarette industry as well as in the small businesses. It is essential, therefore, to compensate for such loss of employment by providing alternative employment and incentives in order to move out of the habit of consumption or participate in production and marketing. The revenue generated out of these tax proposals could be effectively utilized for providing employment in ancillary rural industries or in the household sector. The compensation for the loss of employment will go a long way as a welfare measure for the workers engaged in the sectors.

One of the best outcomes of making tobacco products unaffordable will bring down mortality due to the drop in the diseases caused by tobacco and its products. If estimated the imputed value of such lives saved will be a huge contribution to the welfare of society besides earning revenue for the state. Therefore, it is necessary to consider an excise tax of Rs 1 on each bidi stick, an additional excise tax of Rs 12 per cigarette stick and double the taxes on chewing tobacco. This will be a progressive tax proposal that will have three important positive effects. First, it will discourage consumers in the middle and low-income groups thereby saving a good number of lives. Second, it will generate significant revenue for the government and third this step will provide funds to undertake welfare measures for the displaced laborers or workers in the connected industries. Additional revenue of nearly Rs 50,000 crores can be generated by the government if they consider this proposal.

We are hoping that the union government will lay stress on public health and hike the tax on tobacco products in the upcoming budget.

(The author is Economist and Former Director, Institute for Social and Economic Change, Bangalore)