Among other budget announcements, the Finance Minister announced a 10-15 percent hike in cigarette excise duty in India on the 29th of February.
Mr. Minister, you must know that tobacco kills 10 lakh Indians every year and one-fourth of India is currently using tobacco is some form or the other. Bidis, or hand rolled, indigenous cigarettes and chewed forms of tobacco are far more popular than cigarettes. Most bidi manufacturing takes place in appalling conditions by poor women and child labourers. Therefore, a nominal increase, that too in cigarette taxes alone, can by no means counter India’s devastating tobacco use situation.
Economic prudence warrants that the best way to reduce demand is by raising prices. So, in the case of tobacco, the more unaffordable the products are, the easier it is to counter consumption. The WHO Framework Convention on Tobacco Control (the world’s only public health treaty) also recommends tobacco taxation as the most cost-effective way to fight tobacco use, provided there is simple tax administration and taxes account for at least 70% of the retail price of tobacco products.
Early in February, the issue of tobacco taxation was blazing in Indian media. Findings of a landmark study on the affordability of tobacco products in India commissioned by India’s Health Ministry and the World Health Organization (WHO) were in the news. Tobacco in India is taxed by the central government, in the form of excise, and by the state governments, in the form of value-added tax (VAT). If tobacco products are more expensive in some states, it’s because the respective state government is levying higher VAT. However, the excise tax is very important because is helps to push up the final consumer price of the tobacco product and makes in more expensive for people to buy.
Contrary to this, the recent study has found that prices of tobacco products in India have not risen sharply over time, making them cheaper than essential food items like wheat and pulses. In other words, both current excise and value-added tax (VAT) on tobacco products have been inefficient in pushing up prices of tobacco products and rendering them unaffordable. This news corroborates the findings of the 2015 WHO Report on the Global Tobacco Epidemic, which notes that tobacco taxes in India continue to be well below the FCTC recommendations, particularly in the case of bidis and smokeless tobacco and cigarettes were no less affordable in 2014 than in 2008. This is because although per capita income in India has risen, tobacco taxes have not caught up.
The Virtue Of Simplicity
India does have an immensely complicated multi-tier tax structure and clearly treats cigarette, bidi and smokeless tobacco taxation differently. In fact, cigarettes are differently taxed on lengths and filters. This diversity makes tax administrative very difficult and tax evasion easy since tobacco manufacturers direct products towards illicit trade or introduce new products. Unfortunately, bidis have majorly remained outside the tax net, even though earlier studies have shown that higher taxes on both cigarettes and bidis will lead to a decrease in tobacco consumption and an increase in government revenue.
Within a day of the new study’s release, a cigarette industry front group in India released a fierce reaction to the report, claiming it to be dated and misinforming policy makers. The statement claims that cigarette prices in India are among the highest in the world, making it a haven for illegal tobacco products. The front group accounts legal cigarette smoking in India to be 11% of total consumption, attributing the remaining 89% to other tobacco products and illegal cigarettes and of no concern to them. These unaccredited statistics are only meant to create confusion. While tackling illicit trade is important, uniform taxation of tobacco products is critical.
A cursory reading of two of India’s major cigarette companies’ 2014-15 annual reports also points to staunch dissent and falsified commentary on tobacco taxation policies in India. It seems one of them undertook an ‘analysis’ of the same WHO Report to find that cigarettes taxes in India are among the highest in the world. However, what is more disturbing to read is this: the commentary states that “the company continues to engage with the concerned authorities, both at the Central Government and State level, highlighting the need for moderation in tax rates on cigarettes to maximise the revenue potential from the tobacco sector, arrest the growth of the illegal segment and protect the interest of the Indian tobacco farmer.” The tobacco industry’s lobbying prowess is well known globally, but to read about their blatant submission to such nefarious activities on official statements is terrifying.
Similarly, the annual report of another major cigarette company for 2014-15 laments the strict regulatory environment and skewed nature of taxation on cigarettes and boasts of new outreach strategies. It claims to be responding to the higher taxes by “aiming for steady growth through balanced brand portfolio, consumer engagement programs, quicker response to environmental changes and data-driven decision making process.” They also hope to offer increasingly superior products at multiple price points, which are affordable to various sections of society and improve consumer satisfaction with their brands through quality and innovation, using the latest techniques in consumer research, R&D and manufacturing excellence.
The general debate around a Goods and Services Tax (GST) regime that can levy a uniform and high tax on all tobacco products as ‘demerit goods’ augurs well for the country’s economy. All tobacco products must be equally and highly taxed to accrue public health benefit. At the same time, we have to be alert about official declarations by cigarette companies describing new engagement strategies to lure customers in the wake of higher taxes.