Since the introduction of the Goods and Services Tax (GST) seven years ago, there haven’t been significant increases in the GST rates on harmful products like tobacco and sugary drinks, except for a couple of small hikes in the National Calamity Contingent Duty (NCCD) on tobacco.
As a result, these products have remained relatively affordable, which has undermined efforts to reduce their consumption. In light of this, the proposal by a Group of Ministers (GoM) to raise the GST rate on tobacco and sugar-sweetened beverages from 28% to 35% is a welcome step. However, further tax reforms are necessary to effectively address the public health and financial challenges these products create.
India is the second-largest consumer of tobacco globally, with a significant portion of both adults and young people using tobacco in various forms. Tobacco consumption is a leading cause of non-communicable diseases (NCDs) and contributes to over 3,500 deaths every day in the country.
In 2017, the economic burden of tobacco use, including the costs of second-hand smoke, was estimated at ₹2,340 billion annually, which is much higher than the ₹538 billion the government collects in tobacco taxes. If the GST rate increases to 35%, it is expected that the price of tobacco products will rise, leading to a drop in consumption and a boost in tax revenues.
Preliminary estimates suggest that beedi prices could go up by 5.5%, causing a 5% reduction in consumption and an 18.6% increase in revenue. For cigarettes, the price might rise by 3.9%, with a 1.3% drop in consumption and a 6.4% increase in revenue.
Smokeless tobacco prices could also rise by 3%, leading to a 2.7% decrease in consumption and a 1.9% rise in revenue. Overall, this could generate an additional ₹43 billion each year, as long as the tobacco industry doesn’t shift the tax burden too much to make extra profits at the expense of public health.
While the proposed 35% GST hike is a step in the right direction, it falls short of the 40% maximum rate allowed under the GST law. A 40% rate would likely have a stronger impact, causing higher price increases, greater reductions in consumption, and an additional ₹72 billion in revenue. It would also reduce the risk of the industry passing on too much of the tax burden to consumers.
Right now, the tax burden on different tobacco products is uneven, with beedis being taxed at a much lower rate compared to cigarettes and smokeless tobacco. A 35% GST would help narrow this gap, but a 40% rate would further reduce these discrepancies. The World Health Organization recommends that all tobacco products be taxed similarly to prevent consumers from switching to cheaper alternatives.
The tobacco industry often argues that higher taxes would lead to an increase in illicit trade, but research shows that tax hikes have little effect on illegal markets. Factors like tax administration, regulatory policies, and government enforcement play a much larger role in determining the size of illicit markets. Raising taxes alone doesn’t significantly increase illegal trade if the government strengthens its regulatory systems.
Another issue with the GST system is that it relies on an ad valorem tax, which is calculated as a percentage of the price of the product. This system is less effective than specific excise taxes, which are fixed amounts added to the price of each unit.
The introduction of GST has led to a decrease in the share of excise taxes in the total tobacco tax structure, making it less effective in curbing tobacco consumption. Many countries with GST or VAT also impose specific excise duties on harmful products like tobacco. India should consider increasing excise taxes alongside the GST hike to create a more comprehensive and effective tax system.
The proposed GST increase on sugar-sweetened beverages is also significant. These drinks contribute heavily to health problems like obesity, diabetes, and other non-communicable diseases. Raising the GST on these products to 35% could reduce consumption and help support India’s public health goals. However, just like with tobacco, the government could also consider introducing a specific excise tax on sugary beverages to further strengthen the tax system.
As the GST Council reviews the GoM’s recommendations, it has an opportunity to make meaningful reforms to the taxation of harmful products. Raising the GST rate to 40% for tobacco and sugary drinks would align with the highest rate allowed under GST law, leading to greater public health benefits and increased government revenue.
Pairing this with higher excise taxes would create a mixed tax system that has been shown to be more effective at reducing consumption. It’s also important to address the imbalance in tax burdens between different tobacco products to prevent people from switching to cheaper options. These changes could significantly reduce the health and economic impacts of tobacco and sugary drinks while generating vital revenue for the country’s development.
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