Taxing Tobacco products

Taxing Tobacco products

Taxing Tobacco products

#GS-02 Healthcare, #GS-03 Taxation

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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 problem with current tax method

  • 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.

What needs to be done

  • 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.

Source “Revisit the tax treatment of tobacco products

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