By Dr. Dhiresh Kulshrestha
While the GST Council’s recent scrutiny of caramel popcorn drew ridicule, it inadvertently highlighted a larger failure in India’s tax architecture—one where high-visibility, low-impact goods are taxed aggressively, while substantial informal sectors like smokeless tobacco, particularly khaini, escape with little oversight.
Legal Trade Penalised, Illicit Market Thrives
Khaini, a widely used oral tobacco product, largely operates outside the formal economy. Despite posing serious health risks and commanding a market estimated at ₹45,000 crore, a significant share of its trade evades taxation. Current rules impose a tax burden of over 77% on legally traded khaini—surpassing the average 55% tax on cigarettes. Yet, the bulk of khaini sales remain unregistered, thanks to regulatory structures that deter formalisation.
This creates a paradox. Compliance leads to unsustainable margins, while tax evasion remains the more profitable route. Legal manufacturers, who shoulder a heavier burden, are pushed out of the market, reinforcing a vicious cycle of informality and revenue loss.
Smarter tax design—not stricter enforcement—is the need of the hour. A differentiated cess structure tied to packaging traceability could bridge this gap. For instance, a 60% cess with just 30% formalisation could yield ₹6,750 crore in annual revenue—six times the current collection. A lighter 30% cess with 40% formalisation would bring in ₹6,660 crore while also enhancing traceability and compliance.
Incentivised Formalisation Can Unlock Revenue
India has adopted similar incentive-led formalisation models in sectors like gold, textiles and digital payments. The lesson: when compliance is viable, participation improves.
This is not a defence of khaini, but a critique of a tax regime that loses thousands of crores due to design flaws, not enforcement gaps. If GST is to become more equitable, the focus must shift from taxing visible, low-risk items to capturing value from entrenched informal economies that have long avoided the tax net.
The author is Professor & Dean, Faculty of Economics, Chitkara University. (Views expressed here are author’s own and not necessarily those of financialexpress.com)