Editorial: Sin tax and tobacco use

It is indeed noteworthy that Union Finance Minister Arun Jaitley has increased the specific excise duty on cigarettes in the range of 11 to 72 per cent and by 10 per cent on chewing tobacco. While the revenue generated from tobacco sale will increase substantially, the primary objective of reducing tobacco consumption may not be fully achieved. One of the most important shortcomings is the failure to tax bidis. Bidi consumption constitutes 35 to 40 per cent of total tobacco use in the country; it is far greater than the number of cigarettes smoked. What makes the oversight all the more glaring is that bidis attract incredibly low tax — Rs.12 per 1,000 sticks and Rs.30 per 1,000 sticks for handmade and machine-made products respectively; nearly 98 per cent of the bidis smoked are handmade. That 52 to 70 per cent of bidis smoked in India have escaped even the meagre tax levied on them — either because the manufacturer produces less than two million sticks a year or due to non-compliance — only accentuates the lapse. A 2010 study has shown that a 10 per cent hike in bidi price could cut consumption by 9.2 per cent. The sharp increase in excise duty on cigarettes, particularly in the lowest segment — from Rs.669 to Rs.1,150 per 1,000 sticks — would surely prove to be a deterrent and disincentive to children as young as 15 years from taking up smoking. Over 27 per cent of tobacco users in India are in the 15-24 year age group. Unfortunately, the steep hike has not been accompanied by other measures to rein in consumption.

First, contrary to the WHO recommendation, there is a complete absence of price parity between different tobacco products. As a result, the steep increase in the price of entry-level cigarettes without a concomitant increase in bidi prices may result in product substitution. Second, an important measure that has been either ignored or overlooked is the elimination of the current taxation system that is based on the length of the cigarette; cigarettes of different lengths are treated as different products and attract varying specific duty. Despite the top two tiers — cigarettes of 75-85 mm and over 85 mm lengths — being merged into a single tariff item, there still exists four tiers. The tax differential between the four tiers being more than substantial, there is a great possibility of smokers shifting from longer to shorter length cigarettes; this defeats the very purpose of increasing tax to cut consumption. Third, the government has failed to link the tax rates to an automatic “annual inflation-adjusted increase” to bring about a “real increase” in the price. In its absence, a majority of smokers would in course of time be able to afford the now expensive cigarettes.

Published in The Hindu on July 19, 2014