THE PLATFORM

While cigarettes constitute a source of considerable revenue for the Indian government, it is also crucial to reduce the consumption of these “sin goods” preferably through increased taxation. On similar lines, the finance minister of India, while presenting the 2020-2021 budget, suggested an upsurge in the excise duty charged on cigarettes by raising the national calamity contingency duty levied on them. However, in a surprising move, no such action was taken in the 2021-2022 budget.

Given that India is home to 270 million tobacco smokers, with the activity being responsible for approximately 10 million deaths per year, the government must actively undertake initiatives aimed at not only increasing tax rates on cigarettes but also reforming the structure of their taxation.

Price elasticity of smoked tobacco products

A fundamental law of economics is that the quantity demanded of a product falls as the price increases. Researchers have submitted that tobacco’s addictive nature makes it an exception to the law. A growing body of research, however, does not support this claim and suggests that while smokers’ appetite for nicotine is inelastic, its price has a significant impact on consumption. Craig Gallet and John List observed a mean price elasticity of -0.48 in their meta-analysis that looked at the price elasticity of demand for tobacco goods. This means that a 10% rise in price would result in a 4.8 percent decrease in use. Thus, along with other factors such as literacy, gender, age, and economic status, price is one of the most significant factors in influencing tobacco consumption.

Increased taxes are particularly effective at lowering consumption by young people and those who are economically vulnerable. It has been observed that reductions in demand after considerable price rises are consistently faster and more dramatic than falls following the introduction of most other tobacco-control measures.

There are some apprehensions associated with an increased tax rate and the consequent upsurge in the prices of cigarettes. The cigarette industry claims that control efforts would result in millions of job losses worldwide. However, an analysis of various tobacco-producing countries has demonstrated that the net impact, even of the hypothetical overnight elimination of all consumption, does not result in job losses. The reason behind this is that money formerly invested in cigarettes would then be spent on other goods and services, resulting in the creation of more jobs.

Another common anxiety related to an increase in the tax rate on cigarettes is that the consequent decline in their consumption would impact the tax revenue adversely. However, the United Kingdom offers an excellent example to alleviate this anxiety. Cigarette taxes in the UK have been raised on multiple occasions over the last three decades. Consumption has dropped over this period, with annual tobacco sales dropping from £138 billion to £80 billion over three decades. Revenues, on the other hand, continue to rise. In the United Kingdom, per 1% growth in tax income increases budget revenues by 0.6 to 0.9 percent. According to a model built for this report, a 10% rise in global cigarette excise taxes will increase tobacco tax revenues by around 7% overall, with the results differing by region.

Higher taxes, it has been suggested, would also lead to an uptick in tobacco smuggling and related illegal activities. Steep differences in tobacco tax rates between countries provide an opportunity for smugglers, there is a multitude of possible solutions to this issue. Harmonization of cigarette tax rates among neighbouring countries, adoption of high-quality tax stamps that are difficult to counterfeit, and aggressive tax enforcement, are likely to be effective in curbing smuggling. Moreover, the expenditure incurred in implementing these measures will pay for themselves as taxes are collected on products that previously evaded taxes.

Shortcomings of the multi-tier tax structure

Regarding the taxation of cigarettes, the same is done on the basis of their length and whether they are filtered or not. Since the rates of taxation that cigarettes are subjected to vary with their length, a specific tax rate is delineated for each range of length. Moreover, a difference may be observed between the taxation of filtered and unfiltered cigarettes based on the disparity between the tax burden per gram of tobacco on them.

The magnitude of this burden on filtered cigarettes is substantially greater than that on unfiltered cigarettes, which are largely comparable in this regard.

It is also important to note the significance of the link between the complicated tax structure and greater affordability. The concept of affordability takes into account the interaction between the price of a particular item and the income levels of its consumers. This difficulty demonstrated by a study entitled “Tobacconomics Cigarette Tax Scorecard,” which states that on account of the multi-tier tax structure in India, the task of adjusting income growth and inflation in furtherance of making cigarettes less affordable becomes an extremely challenging one.

A tax structure that provides for different rates of taxation depending upon the length of the cigarettes has a significant defect. It offers ample scope to the cigarette industry to manufacture and promote cigarettes of a wide variety of lengths so as to avert any threat posed by an increase in taxation on certain ranges of length. Therefore, an increase in the tax rate of cigarettes of a specific range of length may easily compel consumers to switch to cigarettes of other ranges of length.

In addition to the aforementioned shortcomings, a labyrinthine tax structure also has a multitude of other pitfalls, with the most important one being difficulty in its proper enforcement, which could lead to a greater possibility of tax evasion.

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The existing tobacco use practices in India are a result of the country’s largely informal economy and taxation system. Improved tobacco regulation can be achieved by: developing a robust tobacco control plan that includes price, detail, and regulatory initiatives to reduce tobacco use; adopting higher and uniform taxes, with a higher excise tax limit on cigarettes that is complemented by annual inflation adjustments. These must be supplemented by practical measures that not only reduce tax evasion and corruption but also increase transparency. Since modest action on cigarette taxes in India could well save millions of lives, it is our hope that these factors are duly considered by the government in the next budget.

Tanmay Gupta is a third year student pursuing B.A., LL.B. (Hons.) at NALSAR University of Law, Hyderabad. He has a keen interest in economics, constitutional law and arbitration, and likes to engage in extensive research for the purpose of mooting and legal writing. His hobbies include reading and singing.

Shobhit Shukla is a third year student pursuing B.A., LL.B. (Hons.) at MNLU, Mumbai. His areas of interest include economics, sociology and public policy. He likes to engage in legal as well as non-academic writing. His hobbies include reading philosophical works and painting.