Context

• The recent proposals by the Group of Ministers (GoM) under India’s GST Council reflect a common-sense approach to taxation, emphasising national priorities of public health and equity.
• These reforms aim to recalibrate the country’s tax structure by lowering GST rates on essential items like bicycles and exercise books while increasing taxes on high-value luxury goods, including tobacco products.
• This dual strategy not only prioritises the well-being of citizens but also addresses the broader societal costs associated with preventable health crises, particularly those arising from tobacco consumption.

The Burden of Tobacco Consumption

• Tobacco usage in India is a public health crisis of staggering proportions.
• Killing nearly 1.3 million people annually and debilitating millions more, tobacco exacts enormous societal costs in terms of lost productivity and escalating healthcare expenses.
• These stark realities underscore the urgent need for effective policy interventions. Among these, taxation stands out as the single most effective measure to curb tobacco use.
• By increasing prices through higher taxes, governments can discourage new users, encourage current users to quit, and prevent relapse among former users.

Benefits of High Taxation on Tobacco Products

• Impact on Consumption Patterns
  • One of the key advantages of taxing tobacco is its ability to influence consumer behaviour, particularly among price-sensitive groups such as lower-income populations and young people.
  • When taxes are raised, the cost of tobacco products increases, prompting consumers to rethink their consumption habits.
  • Studies consistently show that higher tobacco prices discourage people from starting to smoke, encourage current smokers to quit, and reduce overall consumption levels.
  • This price sensitivity is more pronounced among economically disadvantaged groups, who spend a larger proportion of their income on tobacco.
  • As a result, higher taxes are more likely to lead to significant reductions in tobacco use among these populations, creating a disproportionately positive impact on their health.
• Generating Revenue for Public Welfare
  • Beyond reducing consumption, tobacco taxation generates substantial revenue for governments.
  • The paradox of tobacco taxation lies in its elasticity: while higher prices lead to reduced consumption, the decline is typically less than proportional to the tax increase.
  • This means that governments can collect more revenue even as fewer tobacco products are sold.
  • The additional funds generated can be strategically reinvested in public goods and services, amplifying their societal impact.
  • For example, revenues from tobacco taxes can be directed toward strengthening healthcare infrastructure, funding education programs, or supporting anti-smoking campaigns.
  • These investments create a virtuous cycle, where the benefits of reduced tobacco use extend beyond individual health to broader societal gains.
• Addressing Inequities through Taxation
  • Tobacco taxes are inherently progressive when designed thoughtfully.
  • Lower-income individuals, who are more sensitive to price increases, benefit the most from reduced consumption and the associated health improvements.
  • This effect helps to mitigate health disparities, as economically disadvantaged groups are often disproportionately affected by tobacco-related illnesses.
  • Furthermore, the reinvestment of tobacco tax revenues into public welfare programs can enhance social equity.
  • For instance, funding universal healthcare initiatives or subsidising health insurance premiums with tobacco tax revenues ensures that the benefits are distributed widely, including to those who need them the most.

Limitations of India’s Current Tobacco Tax Structure and Measures to Address These Challenges

• Tiered Tax Structure: A Barrier to Effectiveness
  • One of the most pressing issues in India’s tobacco tax system is its tiered structure, where different types of tobacco products, and even brands within a category, are taxed at varying rates.
  • For example, cigarettes may be taxed higher than bidis, and premium cigarette brands often face higher rates than lower-cost alternatives.
  • This disparity creates a loophole for consumers to switch to cheaper options when prices rise for one category or brand.
  • The tiered structure diminishes the deterrent effect of taxation by making it possible for users to maintain their consumption levels through substitution.
  • Bidis, in particular, are taxed minimally or not at all in some cases, despite being a major source of tobacco use in India.
  • This not only perpetuates widespread bidi consumption but also results in significant revenue losses for the government.
  • To address this, India needs a unified tax structure where the same rate is applied per unit of tobacco, regardless of brand, size, or other characteristics.
  • A consistent and simplified system eliminates substitution opportunities and ensures that all tobacco products are equally disincentivized.
• Affordability of Tobacco Products
  • Despite periodic tax increases, many tobacco products in India remain highly affordable.
  • Between 2016 and 2022, cigarettes, bidis, and chewing tobacco products became more affordable on average, largely due to the combination of stagnant tax rates and rising incomes.
  • As tobacco products become more affordable, their consumption increases, counteracting public health efforts.
  • To tackle this issue, taxes must be adjusted annually to account for inflation and income growth.
  • Specific excise taxes, rather than ad valorem taxes (which are a percentage of the price), are particularly effective in this context.
  • Specific excise taxes impose a fixed amount per unit of tobacco, ensuring that prices rise predictably and significantly over time.
  • This approach reduces affordability and maintains the deterrent effect of taxation.
• The Problem of Lower Taxation on Bidis
  • Bidis, a traditional form of smoked tobacco, pose a unique challenge in India’s tobacco control efforts.
  • They are consumed predominantly by low-income groups and are often seen as a cheaper alternative to cigarettes.
  • However, bidis are equally, if not more, harmful to health, and their minimal taxation exacerbates their widespread use.
  • To address this, the government must consider comprehensive taxation and regulation of bidis.
  • Bringing bidis under the same tax framework as other tobacco products would significantly reduce their affordability and consumption.
  • Additionally, targeted public health campaigns and alternative livelihood programs for bidi workers can help mitigate resistance to such reforms.
• Tax on Smokeless Tobacco Products
  • Smokeless tobacco products, including chewing tobacco and gutka, are another area of concern.
  • These products are widely consumed across India and contribute significantly to the country’s tobacco-related disease burden.
  • Yet, their taxation and regulation remain inconsistent.
  • Including smokeless tobacco products in a unified tax structure and subjecting them to regular price increases would complement efforts to reduce overall tobacco consumption.
  • Public awareness campaigns highlighting the health risks of smokeless tobacco can further reinforce these measures.

Conclusion

• The GST Council’s proposed reforms represent a decisive step toward balancing the nation’s fiscal and public health goals.
• Higher taxes on tobacco products, coupled with reduced levies on essentials, reflect a thoughtful prioritisation of societal well-being.
• By aligning taxation policies with national health and equity goals, India can pave the way for a healthier, more productive, and equitable society.

Q) Why is India's tiered tax structure on tobacco products considered a barrier to effective taxation?

India's tiered tax structure allows different tobacco products and brands to be taxed at varying rates. This encourages consumers to switch to cheaper alternatives, such as bidis, when taxes on certain products increase, thereby undermining the deterrent effect of taxation. A unified tax structure, where the same rate applies to all tobacco products, would eliminate substitution opportunities and strengthen tobacco control efforts.

Q) How can India address the affordability of tobacco products to achieve better public health outcomes?

India can reduce the affordability of tobacco products by implementing specific excise taxes that impose a fixed amount per unit of tobacco. These taxes should be adjusted annually to account for inflation and income growth, ensuring consistent price increases over time. This approach discourages consumption by making tobacco products less affordable and maintains the deterrent effect of taxation.

SourceThe Indian Express