The continuation of differential taxes based on filter or non-filter and four different tiers based on cigarette lengths defeats the very purpose of increased tobacco taxation

The Finance Minister Arun Jaitley said the excise duties on various tobacco products other than beedi were being increased by 10-15 per cent. This according to him was “to discourage consumption of tobacco and tobacco products”. But compared with last year (see here and here) , the rate of increase in excise duty has been less.

“It’s one shot prescription to make tobacco products, particularly cigarettes, more affordable,” said Rijo John, Assistant Professor at IIT Jodhpur and a public health policy expert. “Compared with the last five budgets, the percentage increase has been lowest this year.”

The excise duty is levied on tobacco products under three different heads — basic excise duty, national calamity contingency duty and additional excise duty or health cess. Unlike other years, in the case of cigarettes, this year’s budget has not increased the basic excise duty; all the increase has been restricted to additional excise duty or health cess.

Though the increase in the additional excise duty per thousand sticks appears to as much nearly 400 per cent (from Rs.70 per thousand sticks to Rs.260) in the case of filter cigarettes exceeding 65 mm but not exceeding 70 mm in length, the net excise duty works out to only 10 per cent.

“The increase has been 10 per cent for cigarettes of all lengths and whether filter or non-filter and 15 per cent for gutka, chewing tobacco and jarda scented tobacco,” he said. No increase in excise duty has been proposed for beedis this year too. This despite the fact that beedi consumption constitutes 35-40 per cent of total tobacco use in India; the number of beedis smoked is much higher than cigarettes.

Compared with other tobacco products, taxes have always been very low for beedis. Handmade beedis are taxed just Rs.12 per 1,000 sticks, machine-made ones are taxed Rs.30 per 1,000 beedis. It is therefore not surprising that handmade beedis constitute nearly 98 per cent of those sold in India.

Besides the low tax incentive, beedi manufacturers also enjoy the benefit of not paying any tax if they produce less than two million beedis per year. According to a 2010 International Union Against Tuberculosis and Lung Disease (The Union) report (“The economics of tobacco and tobacco taxation in India”), “52 per cent to 70 per cent of all beedis consumed in India have no taxes paid either due to non-compliance” or because the manufacturers supposedly produce less than two million beedis per year.

While beedis and cigarettes have ‘specific excise taxes,’ chewing tobacco products are taxed ad valorem (at a percentage rate based on retail price). As the ad valorem system is linked to the retail price, the tax component can be reduced by making the products cheaper.

The continuation of differential taxes based on filter or non-filter and four different tiers based on cigarette lengths defeats the very purpose of increased tobacco taxation. Consumers tend to either switch over to shorter cigarettes that cost less or companies themselves make the same brand of cigarettes at smaller lengths to make it cheaper.

“India levies tiered specific excise taxes on cigarettes, with seven brackets of basic excise duty (BED) based on cigarette length and whether or not there is a filter. But differential taxes lead to loopholes. One popular brand, Gold Flake [an ITC product], is sold in 84 mm, 74 mm and 64 mm lengths. The 74 mm version is marketed as a premium brand, but is subject to the second lowest excise applied to cigarettes Rs.509  per 1,000 sticks despite being priced similarly to the 84 mm version, which bears an excise of Rs.2,390 per 1,000 sticks,” notes a WHO report.

Making it worse is the huge price difference between different tobacco products — cigarettes, beedis, and chewing tobacco. According to the WHO, the excise duty should be “consistent across tobacco products” to prevent product substitution.

Since tobacco taxation is not linked to annual inflation and income growth in India, tobacco products tend to get cheaper and easily affordable. The only way to make it less affordable is by raising taxes steeply every year.  The WHO report on the global tobacco epidemic, 2015 said: “In many countries [including India]…tobacco has become increasingly affordable, which contributes to increases in its use. This has occurred despite increases in tobacco taxes in some of these countries, since the resulting price increases have not been large enough to offset growth in real incomes.”

Published in The Hindu on March 1, 2016