Taxing Tobacco products

#GS-02 Healthcare, #GS-03 Taxation

Need to Change taxation methods of Tobacco

Since the implementation of the Goods and Services Taxation (GST) tobacco taxes have not increased significantly.
Hence, they have become more affordable in the past five years.
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 in 2017.
However, India’s average annual tobacco tax revenue stood at a measly ₹537.5 billion.

The current GST system has some features which are hindering the efforts in regulating consumption.
One major issue is the overuse of ad valorem taxes, which have been proven to be not effective in reducing consumption.
To overcome this most countries, use a specific or mixed tax system for products which are harmful.
However, the GST system relies more on ad valorem taxes than specific excise taxes.
Central excise duty as a share of 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 currently applied on tobacco products is specific.
However, they need to be revised regularly to adjust for the inflation or they lose their value.

The main principle behind tobacco taxation has been the protection of public health.
But, even though cigarettes accounts for only 15% of tobacco users, they generate 80% or more of tobacco taxes.
This means that Bidis and smokeless tobacco have low taxes which encourages consumption.
Since none of the tobacco products are more or less harmful than the others, the taxes should be made more consistent across all.
It should also be noted that despite being just as harmful as cigarettes bidis are the only tobacco products without a compensation cess under GST.
Cigarette companies are able to avoid taxes legally by manipulating cigarette lengths and filters for similarly named brands due to the current six-tiered tax structure for cigarettes.
Another point to note is that certain smokeless tobacco ingredients such as tobacco leaves, tendu leaves, betel leaves, areca nuts, etc. have either zero or 5%-18% GST.
This need to be changed and all products that are exclusively used for tobacco making should be brought under the uniform 28% GST slab.

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