Since it’s ‘World No Tobacco Day’ today, let’s start with a statistic. Did you know of the three adults you meet today, chances are that one of them consumes tobacco or tobacco related products? In fact, India is the second largest consumer and producer of tobacco in the world. Everyday 3500 people succumb to the use of tobacco. Cigarette and tobacco consumption not only affects the health, it also has economic repercussions.
According to the World Health Organisation (WHO), the total economic costs from tobacco use from all diseases in India in 2018 was about $27.5 billion. The most prevalent form of tobacco products consumed in India are smokeless products such as khaini and gutkha. Alongside this, smoking forms like cigarettes and hookah are consumed no less.
What is the tax structure on tobacco, cigarettes in India?
Even though academics and experts, including the World Health Organisation have stressed on the need to raise taxes (be it through cess, excise duties, or GST tax slabs) to discourage tobacco use, in the Budget 2022 the government kept the sin tax unchanged for the second year in a row. The last time the government had hiked taxes was in Budget 2020: Finance Minister Nirmala Sitharaman increased excise duty on cigarettes, by way of increasing the National Calamity Contingent Duty (NCCD) on cigarettes and other tobacco products, except for bidis.
Sin taxes, like the name suggests, are imposed on products or services that could be harmful to the people or to the society – such as tobacco, gambling ventures, and sugar products. Sin taxes, particularly on tobacco products could be looked at from the lens of pre-GST and post GST. Currently, the government levies GST of 28 per cent, the highest in the tax slab, on cigarette and tobacco products such as pan masala. Further, there are additional taxes taking the total tax incidence on cigarettes to as much as 50-60%, which is lower than that recommended by the WHO.
Sin Taxes: Pre-GST and Post-GST
| Pre-GST components of taxation | Post-GST components of taxation |
| Basic Excise Duty (BED) | Goods and Services Tax (GST) |
| Additional Excise Duty (AED) | National Calamity Contingent Duty (NCCD) |
| National Calamity Contingent Duty (NCCD) | Compensation cess |
According to a study by Indian Institute of Public Health, Odisha, despite the implementation of GST, which was supposed to simplify the tax structure, it has only added to the complexity of the structure. This is in the form of compensation cess as well as NCCD. Furthermore, the cess is levied based on the length of cigarette, which further adds to the complexity of computing taxes. In addition to that, taxes do not increase proportionately to increase in inflation.
The study also found out that cigarette-makers’ practice of manufacturing multiple lengths of cigarettes gives them an edge to use the tax system to keep the total demand intact in the event of a price change. The study found that this practice should be discouraged for making the tax system effective. Cigarettes are available in various forms and sizes and taxes on them vary according to the size.
India lags in imposing tax burden on cigarette consumption
For example, according to a calculation done by Cleartax.in, if the size of a cigarette is under 65mm, and its value is Rs 5 per unit, total tax on it under the new tax structure could be around Rs 3. While for a cigarette which is between 70 to 75mm in size and its value is Rs 15 per unit, total tax of around Rs 6.5 could be levied on it. This means in the first case, the tax is about 60 per cent of the value, while in the second case tax is about 45 per cent.
| Cigarette under 65mm | Cigarette between 70 to 75mm | |
| Value | Rs 5 | Rs 15 |
| GST (28%) | Rs 1.4 | Rs 4.2 |
| Approximate Cess (5%) | Rs 0.25 | Rs 0.75 |
| Approximate cess per 1000 sticks | Rs 1.591 | Rs 2.876 |
| Probable price that can be charged | ~Rs 8 | ~Rs 21.5 |
Studies have indicated that the total tax burden of cigarettes in India is about 52 per cent, which is much lower than 75 per cent as recommended by WHO. According to WHO, increasing the retail prices of cigarettes and tobacco products is the most effective measure to discourage consumption of these products. The way ahead is to reduce the affordability of cigarettes, experts say, and raising taxes on tobacco products could be the first step.