It is now well-established and widely-accepted that the goods & services tax (GST) is the biggest tax reform in the history of India, with a potential to transform the fiscal architecture of this country. The law will bring uniformity in the taxation structure across the country, increase tax collection for the government, and will also remove inefficiencies in the system by reducing the cost of transaction, bringing down or rationalising the tax rates and making India one common market for business. Overall, as hailed by industry experts and people from various strata, this is a good step forward for the country and GST is expected, ceteris paribus, to increase India’s GDP by 1-1.8%.
GST-like reforms are a rarity in India (or for any country, for that matter) where such a big overhaul of the indirect tax scheme is being carried out, but many areas still need to be addressed by the government. With a reform of such scale, it presents a huge opportunity to rethink the entire tax policy and create a homogeneous and common system across various sectors as opposed to the fragmented policy approach which currently exists.
The current indirect tax structure in India provides for some exemptions, exclusions to some of the priority sectors—viz agriculture and allied activities, micro businesses, education—and also includes sectors like healthcare, pharma, etc. The main driver of these exemptions/exclusions is to have a tax policy consistent with social objectives—keeping prices under check and avoiding tax burden on people with limited earnings. However, these exemptions/exclusions also break the tax supply chain, leading to cost inefficiencies in the entire chain.
While the tax policy for the sectors mentioned needs to be examined in depth, our focus is on the taxation policy for the tobacco industry—the issues therein and suggestions to resolve those issues.
Tobacco is an important sector in India which earns a large amount of money for the national exchequer in the form of excise revenues and foreign exchange. As per the statistics of the Tobacco Institute of India, chewing tobacco and bidis constitute 90% of the tobacco industry, and cigarettes have only 10-11% share. Moreover, tobacco is an important cash crop in India and a large part of it is exported as well. But the differential and discriminatory tax policies on the different segments in this sector lead to a large quantum of tobacco remaining outside the tax purview.
Health and revenue are the two key premises which act as the basis of tobacco taxation. However, the taxes are focused to capture the organised business of cigarette manufacture. Another part of tobacco sector which also includes chewing tobacco, bidis, etc, remains out of the tax net on various accounts, including exemptions provided to some of the products, exemptions provided to small businesses and illicit trading of tobacco products, leading to tax evasion.
The tobacco industry has also been subject of various studies by the World Health Organisation, wherein illicit trading of tobacco products has been highlighted as a major global concern, including concern for health, legal and economic, governance and corruption.
Various studies on the tobacco sector indicate significant tax evasion by players in the unorganised sector. Some studies estimate that almost 90% of chewing tobacco remains untaxed through tax avoidance and as much as 70% of total tobacco consumption remains untaxed.
With GST, the government has the opportunity to redefine policy mechanisms to bring the whole tobacco sector into the purview of GST. The key task for the government at this stage is to design an effective tax policy, which not only ensures that all the tobacco products are taxed under GST at the same level, but also to curb the unorganised sector in this industry, which is causing huge tax evasion.
The key objective of the policy is to bring in the entire supply chain within the GST net, which could be achieved if the proceeds of the first point of sale of tobacco leaves are brought in under GST net. The sale of tobacco leaves takes place mostly through auctions conducted by the Tobacco Board and through the APMC yards, and therefore the sale can be monitored easily by the government. At this stage, the government may make an effective use of the reverse charge mechanism and may introduce levy of GST on the organised business engaged in purchase of un-manufactured tobacco and keeping the farmers, small traders and mandis out of GST purview. Being creditable levy, GST at the first point of sale should not add to the cost for the tobacco manufacturer as the subsequent legs in the supply chain would be liable to GST, instead the government will be able to monitor the entire supply chain and it will also help curb illicit trading of tobacco and its derivative products.
Whilst the government acknowledges the economic importance of tobacco, the differentiated tax policy on this sector has made tobacco products of questionable quality, manufactured in unregulated conditions in the unorganised sector, affordable to the poorest of poor consumer of tobacco—thereby undermining the health objectives. Additionally, FICCI’s studies on the tobacco sector show that there is significant revenue leakage, estimating to over R9,000 crore per annum, on account of illicit cigarettes alone.
Tobacco is an important sector for India in terms of tax revenues and its scale. We have a huge opportunity with GST to move from a fragmented tax policy in this sector to a more homogeneous and consistent policy, which brings in the whole supply chain of the tobacco business into the tax net and convert the unorganised sector into organised, providing benefits to all attached—tobacco farmers, small traders, manufacturers and end-consumers. Historically, there have been many ills plaguing this sector because of unstructured policy decision. GST provides a “now or never” opportunity to bring about a paradigm shift vis-a-vis taxation of tobacco products. The unstructured and differentiated approach to taxation of tobacco products must be replaced by a holistic policy, whereby tobacco is taxed from the first point of sale right up to the end-product, with input tax credit at each stage of value addition. This will help bring all tobacco into the organised sector over the long-term and reduce revenue leakage and evasion, and generate revenue that can be used for developmental work.
More importantly, appropriate taxation will also ensure that it will not be possible any more to offer inferior and unhygienic tobacco products to the poorest consumer at affordable prices. This will go a long way in serving the health objectives of the government.
(With inputs from Anshul Aggarwal, director, Indirect Tax, BMR & Associates)
The author is leader, Indirect Tax, BMR & Associates LLP.
Views are personal