Raising compensation cess on all tobacco products may garner an additional tax revenue of Rs 49,740 crores.
As the government falls short of revenue amid the pandemic-led disruptions, the public health groups, doctors, and economists have urged the GST Council to increase compensation cess on all tobacco products to boost revenue. The move is expected to raise additional tax revenue of Rs 49,740 crores, which could significantly contribute to the increased need for compensation by different states during the pandemic and to disburse the dues already owed by the centre. In a letter to Finance Minister Nirmala Sitharaman, the Voluntary Health Association of India (VHAI) wrote that it is urgent to increase taxes on all tobacco products, especially on bidis, to arrest health risks and garner additional tax revenue.
The GST revenue receipts of both central and states governments have been severely affected due to the Covid-19 pandemic and the central government has not been able to distribute the compensation cess. However, applying compensation cess on bidis and raising the existing compensation cess on cigarettes and smokeless tobacco products is believed to be an effective policy measure to address the immediate need to raise the compensation cess revenue by the central government. The group also suggested that such a measure can be a more attractive solution than market borrowing to compensate state governments for their respective GST revenue shortfalls.
The letter underlined that all tobacco products have become more affordable over the past three years since the GST became effective in 2017. The WHO recommends total taxes to represent at least 75 per cent of the retail price for all tobacco products. However, at present, the total tax burden is only 49.5 per cent for cigarettes, and 63.7 per cent for smokeless tobacco in India, which is well below the minimum recommended by the WHO, VHAI said. Bidis, on the other hand, enjoy an extremely low tax burden of only 22 per cent despite being as harmful as cigarettes and smoked by almost twice as many Indians smoke cigarettes. This also result in estimated annual costs from diseases and deaths to the tune of Rs 80,550 crore, or 0.5 per cent of India’s GDP.
“Unprecedented financial resources will be needed for the country to recover from the economic shock Covid-19 has created. Even though imposing additional taxes on the general public might not be a viable policy option when consumption needs to be boosted, compensation cess on tobacco could be a win-win as it will discourage tobacco consumption while bringing in substantial revenue for the government,” said Rijo John, Economist & Health Policy Analyst. Re 1 compensation cess per stick of bidi and significant cess increases on cigarettes and smokeless tobacco products are expected to generate additional tax revenue to the tune of Rs 50,000 crores, he added. Meanwhile, India has the second-largest number of tobacco users — 26.8 crore or 28.6 per cent of all adults in India — in the world.