Originally Published 2014-07-09 09:21:33 Published on Jul 09, 2014
The skewed tobacco taxation policy, far removed from a reality based understanding of the tobacco consumption and economics, is not helping the government achieve any goals. It is perhaps due to either a strong lobby, or the desire to protect 36 million beedi workers or just bad strategy.
The fallacy of Govt's tobacco taxation
Before this article starts, it must be pointed out that it does not condone cigarette smoking or negate the ill effects of tobacco consumption on the human body. This said, the policies used by the previous government to control tobacco in India, which continue today, are at best ill conceived and at worst counter-productive. In a stated bid to curb tobacco consumption and to garner tax revenues, the government has consistently followed a policy of high taxation of cigarettes, ignoring not only the characteristics of the Indian tobacco sector, but basic economics as well. Tobacco is not indigenous to India. Consumption of tobacco in India dates back to early sixteenth century when it was introduced by the Portuguese. Suited to the Indian climate, it soon became a preferred cash crop and has intertwined in India’s history. Since then, India has become the third largest tobacco producer in the world and in 2011-12 exported USD 797.9 million dollars worth of tobacco. There are 8 types of tobacco produced in India, primarily in the southern states of Andhra Pradesh, Karnataka and Tamil Nadu. There are 18 varieties of tobacco products for consumption in the Indian market, ranging from cigarettes, beedis and other smoking products to gutka, khaini, pan masala and other chewing products. India’s tobacco consumption pattern differs from the rest of the world. The predominant form of tobacco consumption is chewing tobacco, followed by beedis and then by cigarettes. Cigarettes only constitute 15% of total consumption in the country. According to the Central Tobacco Research Institute (CTRI), the industry employs 36 million people, 10 million of which work in beedi production, 98% of which is in the informal sector. Cigarette production on the other hand is more formal and mechanised and thus low on labour intensity. While taxation is used primarily for revenue generation in other sectors, in tobacco, though this also holds true, taxation is more a tool to deter tobacco consumption. The government believes, and partially correctly so, that increasing prices of tobacco products will deter consumption. This theory was further supported by the World Health Organization in its Framework Convention on Tobacco Control (FCTC) in 2005, which aims to create a universal policy to reduce consumption. Taxation on tobacco includes a specific duty and a value added tax, the latter differing from state to state. India’s tax policy on tobacco is the highest in the world, nine times higher than United States and five times higher than China. Tobacco taxation was shifted from taxes on tobacco production to tobacco products in 1979. All tobacco products are taxed at some level, but the brunt of the taxation policies in India falls on cigarettes. Varying by length of the cigarette, excise duty on cigarettes in 2012-13 ranged from Rs 669 per thousand cigarettes to Rs 2788 per thousand cigarettes. At the same time, the excise duty on beedis was Rs. 11 per thousand sticks for hand-rolled to Rs. 23 for machine made. To further illustrate the focus of taxation policies on cigarettes, excise duty on the shortest cigarettes has jumped from Rs 168 in 2007-08 to Rs 669 per thousand sticks in 2012-13.Compared to this, duties on beedis rose from Rs 9 per thousand sticks in 2008-09 to Rs 11 per thousand sticks in 2012-13. VAT on cigarettes ranges from 12.5% in some states to as high as 65% in others. The fallacy of the central government tobacco taxation policy is not in the disparity between taxes in cigarettes and beedis but the impact of such increases on the overall consumption patterns. The problem with the WHO theory, which the government subscribes to, is that it fails to understand the Indian tobacco consumption scenario. Like many multilateral organizations, it wrongly believes the "one size fits all" strategy will be conducive to reducing tobacco consumption in India, where cigarette smoking only constitutes a minor share of total consumption. While a sharp increase in the price of a product may actually deter large number of consumers to give up consumption of that product, what the government does not understand is that tobacco, unlike other products, is addictive. Giving up consumption of the product altogether is likely to be an option for only a small segment of the smoking population. For the majority, finding an alternative is usually the logical course of action. What price rise thus creates is a substitution effect, wherein consumers smoking cigarettes, especially those already smoking smaller length, cheaper cigarettes would be inclined to move to beedis instead. Substitution effect is a basic tenet of economics. At current prices, a single cigarette stick costs between Rs 8 to Rs 12 in the market. A pack of beedis (20 sticks per pack) can cost between Rs 5 to Rs 10. A person, addicted to tobacco, consuming cheaper cigarettes and unable to afford a price rise, will (if he/she can’t quit) shift to the cheaper beedi. A similar trend was documented in Sweden, where steep increases in the price of cigarettes led to a booming snuff (chewing tobacco) market. While high taxes may achieve the government’s objective of limiting cigarette consumption in the country, it does not help the overall public health target of reducing tobacco consumption. Furthermore, it has been widely accepted that a single beedi is chemically as harmful, if not more, than a cigarette. According to the report by the WHO itself on Global Tobacco Epidemic, a beedi contains three times the amount of carbon monoxide and five times the amount of tar than a cigarette. It also states that a beedi smoker is at three-time higher risk of developing respiratory and oral disease than a cigarette smoker. The rise in prices does more than just cause substitution effect. The high VAT rates on cigarettes across borders as well as the 40-55% increase in prices in the last two years have given rise to substantial illicit trading. Smuggling of cigarettes has risen from 17% of the total market to 19% in the last two years alone, estimating a revenue loss of Rs. 6000 crores to national accounts. The focus of the government on taxing tobacco has been for two reasons. One, to maximize revenue from tobacco products, especially higher end products and two, to reduce the public health costs related to tobacco consumption. But the skewed taxation policy, far removed from a reality based understanding of the tobacco consumption and economics, is helping the government achieve neither target. It is perhaps due to either a strong lobby, or the desire to protect 36 million beedi workers or just bad strategy or a bit of all, that this fallacy has not been recognized. If the government is serious about achieving its stated goals, the current taxation policy is not only irrelevant to the Indian tobacco industry, it is in fact making the situation worse. (The writer is an Associate Fellow at Observer Research Foundation, Delhi)
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