In India, 28.6% of adults above 15 years and 8.5% of students aged 13-15 years use tobacco in some form or the other. This makes the country the second largest consumer of tobacco in the world. 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. India also bears an annual economic burden of over ₹1,77,340 crore on account of tobacco use. Yet, there has been no major increase in taxation of tobacco products to discourage the consumption of tobacco in the past four years since the introduction of the Goods and Services Tax (GST) in 2017 except for a small increase in the national calamity contingent duty (NCCD) in the 2020-21 Union Budget which only had the effect of increasing the average price of cigarettes by about 5%.
A worrying trend
The absence of an increase in tax means more profits for the tobacco industry and more tax revenue foregone for the government — revenue that could have easily been utilised during the COVID-19 pandemic. There has been a 3% real decline in GST revenues from tobacco products in each of the past two financial years. The average annual tax revenue collection from all tobacco products (based on the past three years), including excise duty, NCCD, GST, and compensation cess, is about ₹53,750 crore.
Excise taxes on many tobacco products used to be regularly raised in the annual Union Budgets before the GST. Similarly, several State governments used to regularly raise value-added tax (VAT) on tobacco products. During the five years before the introduction of the GST, most State governments had moved from having a low VAT regime on tobacco products to having a high VAT regime. The 17.3% relative reduction in the prevalence of tobacco use among adults that India experienced between 2009-10 and 2016-17, as shown by the Global Adult Tobacco Survey, could be partly attributed to this as well. International literature recognises tax increase as one of the most cost-effective ways of regulating the consumption of tobacco.
Source: Standalone Operating Results FY12 - FY21, ITC 2021
The lack of tax increases in post-GST years might mean that some current smokers smoke more now and some non-smokers have started smoking. This could potentially lead to a reversal of the declining trend in prevalence. This might jeopardise India’s commitment to achieving 30% tobacco use prevalence reduction by 2025 as envisaged in the National Health Policy of 2017 by the Government of India. The lack of tax increase means that the tax burden on tobacco products (tax as a percentage of the retail price) decreases. The tax burden on bidis, cigarettes, and smokeless tobacco, on average, stands at 22%, 53%, and 64% in 2021, while the World Health Organization has been recommending a uniform tax burden of at least 75% for each tobacco product.
Given that the vast majority of tobacco taxation today is in the form of GST and compensation cess and their revision requires consensus within the GST Council, tobacco taxation has not seen any increase whatsoever under the GST since 2017. In other words, the tobacco industry has been virtually enjoying four years without extended tax on tobacco products, since the introduction of the GST. This has made tobacco products more affordable post-GST as shown in recent literature from India. This is highly detrimental to public health.
Meanwhile, the share of central excise duties including NCCD in the total tobacco taxes decreased from 54% to 8% for cigarettes, 17% to 1% for bidis, and 59% to 11% for smokeless tobacco products, on average, from 2017 (pre-GST) to 2021 (post-GST). Several countries in the world have high excise taxes along with GST or sales tax and they are continuously being revised. Yet, the excise duty on tobacco in India continues to remain extremely low.
A considerate view of public health
The Union government should take a considerate view of public health and significantly increase excise taxes — either basic excise duty or NCCD — on all tobacco products. The upcoming Union Budget gives a perfect opportunity for this. The Budget should fix an excise tax of at least ₹1 per stick of bidis while aiming for a significant increase in the excise tax of cigarettes and smokeless tobacco products. Taxation should achieve a significant reduction in the affordability of tobacco products to reduce tobacco use prevalence and facilitate India’s march towards sustainable development goals.
Rijo M. John, a health economist, is an adjunct professor at Rajagiri College of Social Sciences, Kochi