Sarit Kumar Rout, Indian Institute of Public Health Bhubaneswar, PHFI emphasises on the need for tougher tobacco regulations for the best interests of people’s health and points out the loopholes in the current taxation measures
A powerful mechanism by which the government can control tobacco consumption is raising prices of tobacco products through higher taxes. Evidence from around the world supports this view and therefore countries are initiating efforts to make tobacco products unaffordable through appropriate fiscal policies.
Despite being the third largest producer and second largest consumer of tobacco in the world and losing one million people to the habit every year, India has not been able to use tobacco taxation policy to its advantage. For the financial year 2016-17, the central government has proposed to increase the union excise duty on all tobacco products by 10-15 per cent excluding beedi. The exclusion of beedi though is questionable from a public health perspective, and the overall moderate increase in excise duty defeats the purpose of tax reforms introduced in 2014-15 budget. During 2014-15, the then newly elected government introduced some well-intentioned reform measures in tobacco taxation, which were commendable. For the first time there was such a large increase in the tax rate on low priced, unfiltered cigarettes. The basic excise duty on the lowest tier unfiltered cigarettes (<65mm) increased to Rs 1280 per 1000 sticks from Rs 509 per 1000 sticks in 2013-14 and the tax rate on 65 to 70 mm length was fixed at Rs 2335, which was 34 per cent higher than the filtered cigarette of same length. During 2015-16, the government proposed to enhance the excise duty on cigarette not exceeding 65mm by 25 per cent and 15 per cent for cigarette of other lengths. The proposed hike of 10-15 per cent in 2016-17 is the lowest in last three years. The earlier initiatives could have been reinforced in the current budget to discourage consumption of low priced cigarettes by reducing the price differentials between various lengths of cigarettes.
India still has a six tier product structure and a multi-tiered excise tax system for it provides leeway to producers to manipulate tax increments and enables product substitution for in wake of a price rise. A 2015 WHO report from last year observes that India is in the group of 37 countries that uses complex, tiered taxes leading to greater variability in tobacco product prices. A WHO report from 2015 has highlighted India’s complex tax also and has found that cigarettes have become more affordable in India between 2008 to 2014 like in China, Indonesia and Vitenam whereas they have become unaffordable in neighbouring countries like Bangladesh, Pakistan, Thailand and Philippines. Similar findings were observed in a recent study Tobacco Taxes in India: An Empirical Analysis commissioned by India’s Health Ministry and WHO India, which states all tobacco products have become affordable since real incomes have risen quicker than prices of tobacco products between 2006-2013.
In fact, price indices of essential food products have risen in comparison to tobacco during the study period. Adding the most recent tax increase (2014-15), it is observed that though the relative price indices of cigarette have gone up more than food products, for beedi and chewing tobacco prices are still less than food products (see the figure). This study also reveals that India’s total tobacco taxes make 58 per cent of retail price in India, which falls well short of the WHO recommended 70 per cent of excise rate.
Another major shortcoming of the current fiscal policy stance is that non-cigarette products, particularly beedi continues to be taxed at low rate. The current effective tax rate at 2.1 paise per stick for machine made beedis and 1.2 paise for manmade remained unchanged in the new budget proposal. Keeping beedi out of ambit of the excise tax hike for the last three years is uncalled for where more than nine per cent adult Indians smoke the product. Since beedi smoking is largely concentrated among the socio-economically disadvantaged groups, they are more likely to have health hazards due to multiple factors. With growing evidence showing poverty and low health status of beedi workers, the unfavourable tax treatment to beedi neither achieves the health nor the revenue objective. Beedis contributed only Rs 404 crore on average (0.12 per cent of gross tax revenue) to the exchequer in thelast 12 years. One recent study by PHFI shows that excise on beedi can be increased by 100 per cent of the current excise without any loss of revenue. This study suggests that the total revenue from beedi can be enhanced to Rs 430 crore leading to a decline in beedi consumption. The low tax rate has resulted in an appallingly low level of total tax burden at about 20 per cent of the retail price in 2012-13. Besides the low tax rate, the tax exemptions provided to beedi manufacturers producing less than two million beedi sticks per year incentivizes manufacturers to retain beedi production as a small scale industry. This only furthers the informal growth of the beedi industry, which accounts for more than 95 per cent of total beedi manufacturing. The tax incentive has led to exploitation of millions of beedi workers (3.5 million full time and 0.7 million part time) by the manufacturers who deprive them of their basic entitlements. Most of them are underprivileged either due to non-application of the Minimum Wage Act or partial application of social security provisions. In contrast, many believe that this sector provides large employment and is a potential source of revenue to the government. However, the health cost of Rs 1045 billion (2011) attributable to tobacco related diseases cannot be ignored.
Besides smoking products, a substantial number, around 21 percent adults use smokeless products. The current budget proposed to increase the tax rate on chewing products from 70 per cent to 81 per cent in 2016-17. However, the compounded levy scheme applicable to paan masala, gutkha and chewing tobacco and the duty payable as per capacity of the machine, complicates the governance and administration of tax. Further, the industry strategy to produce various brands with low unit prices has not become effective in reducing consumption in spite of a tax increase. This is further complicated either by a very low rate of tax or exemptions provided to the raw materials: betel leaves, betel nuts, and areca nut powder.
Given the myriad varieties of tobacco use and the complex and inconsistent taxation system, Indian consumers have a wider choice of tobacco alternatives than in the South Asian Region. There are close substitutes available in the market encouraging product substitution in the event of a price rise. However, in order to check the growing menace of tobacco, which largely contributes to the increasing incidence of non-communicable diseases, the government should stop differential tax treatment of tobacco products, which benefits the industry at the cost of nation’s health. In contrast to middle and high income countries, where tobacco is uniformly taxed, the government’s efforts to tax tobacco products differently in India and more specifically keeping beedi out of the tax net may usher short term political gains. But in the long run, the nation has to bear the huge cost for treatment and prevention of diseases attributable to tobacco use and households have to undergo unexpected misery due to loss of their family members in the productive age group.
The effective increase in prices resulting from the current tax hike depends upon the VAT levied at the state level, which varies across for the smoked and smokeless products. States in India are given power to impose VAT on tobacco products and due to divergent tax rates, the tax system does not seem to be efficient as there is free flow of goods from low priced to high priced states.
The multiplicity of the tax system by the union government, which not only makes the tax administration difficult but also provides scope for tax evasion needs to be corrected. Similarly, it is imperative to introduce uniform tax rates across states to curb free movement of goods in order to achieve the principles of sound public finance. The new budget proposal has undermined reforms around tobacco taxes introduced in the past two years to make the tax rate competitive as per the international standards. The growing illegal cigarette market resulting from a cigarette tax increase as claimed by trade lobbyists (if true) should not be the sole criteria to forgo tax increase in India and make it comparable to international tobacco control norm. Strengthening tax administration, increasing enforcement and imposing severe penalty will help controlling the illegal trade as it is done in countries like Italy, Romania and Spain. Finally, reducing the tier based tax system and uniformly taxing all tobacco products could minimise the adverse health impact and at the same time maximise the revenue potential.
(The author teaches health economics and financing and researches on healthcare financing and tobacco economics)