Can’t leave 80-90% of base lightly taxed or untaxed
Has the government been hiking excise duties on cigarettes over the years because they are luxury products or because tobacco is supposed to cause cancer and it wants to discourage its use? Presumably it is more of the latter since the government has also been quite insistent, and rightly so, on bigger pictorial warnings on cigarette packets.
But if this is so, surely the same logic should apply to other tobacco products like bidis, chewing tobacco or loose tobacco for hookah that comprise nearly 90% of tobacco consumption in the country? Yet, while cigarettes end up paying an excise duty of around 50%, bidis get taxed at around 2-3% once you take into account the various exemptions given to those produced by units under a certain size and chewing tobacco pays around 5-6%—VAT rates differ from state to state, but are roughly 26% for cigarettes and 8-10% for bidis and chewing tobacco.
Not surprisingly, while the share of cigarettes in total consumption of tobacco has halved from around 20% in the early 1980s, there has been little drop in overall consumption—while the acreage under tobacco has risen from 3.7 lakh hectares across the country in 2003-04 to 4.8 lakh hectares today, production has risen from 5.5 lakh tonnes to 8 lakh tonnes; according to the cigarette industry, around a fifth of cigarettes in the country are smuggled and do not pay any form of duty.
So, if the government is serious about reducing tobacco consumption, it needs to act on various fronts. For one, it needs to find alternate crops for tobacco farmers/workers since there can be no serious move to reduce consumption unless this is done—if other crops grown on the same land offer less revenue, a combination of direct cash transfers to farmers/workers needs to be examined. Second, in the context of GST, the government needs to ensure as much of the tobacco base is taxed as possible.
This is not going to be easy given the unorganised nature of the non-cigarette part of the industry but one way out is to start taxation at the first stage of production—since most of the tobacco is sold at APMC yards or in tobacco auctions, doing so should be relatively easy.
As the production cycle carries on, input tax credits can be given. If this is not done, the government can keep taxing cigarettes at a higher and higher rate, but this won’t reduce the consumption of tobacco—which is the real objective—and, over a period of time, with smuggled cigarettes offering sellers a higher margin, even tax revenues from cigarettes will begin to slow down.
In the past, there has never been any opportunity to address this issue in a holistic fashion. But now, with the GST Council, all state governments and all shades of political opinion are represented in one room—in other words, should the political class want, a more durable solution to taxing tobacco can be arrived at.