Revisit the tax treatment of tobacco products

Last Updated31/01/2023

Research in India and around the world supports the use of taxes to regulate tobacco consumption.
However, in India, tobacco taxes have not increased significantly since the implementation of the GST over five years ago, making these products increasingly affordable.

Overuse of ad valorem taxes: The GST system in India relies more on ad valorem taxes than the pre-GST system, which primarily used specific excise taxes. These taxes are not effective in reducing consumption.
Decreased share of central excise duty in total tobacco taxes: It has decreased substantially from pre-GST to post-GST for cigarettes, bidis, and smokeless tobacco (59% to 11%).
Specificity of taxes & levies: A large part of the compensation cess & National Calamity Contingent Duty/ NCCD (levied on certain manufactured goods under VII Schedule of Finance Act, 2001) currently applied on tobacco products is specific.

Low taxation: Despite cigarettes accounting for only 15% of tobacco users, they generate 80% or more of tobacco taxes. Bidis and smokeless tobacco have low taxes, encouraging consumption.
Complex six-tiered tax structure for cigarettes: It creates opportunities for cigarette companies to avoid taxes legally by manipulating cigarette lengths and filters. Instead, the tiered system should be eliminated or reduced.
No uniform tax slabs for tobacco ingredients: GST rates on smokeless tobacco ingredients have either zero or 5%-18% GST. Bringing them under a uniform tax slab will give a message to discourage tobacco consumption.
Inefficient taxation on smokeless tobacco products: It is mainly due to their small retail pack size which keeps the price low. Mandatory standardised packing should be implemented for smokeless tobacco.
Including tobacco & bidi manufacturers under GST: Tobacco & bidi manufacturers operate in informal sector & due to their small size they are exempted from taxation. So, conditions should be imposed on exemptions.

While most countries regularly increase taxes on tobacco products to make them less affordable, India has not increased taxes on any tobacco products in over five years.
Both the GST Council and the Union Budget should take the opportunity to significantly increase taxes on all tobacco products, including bidis, cigarettes, and smokeless tobacco, through hikes in excise duties or compensation cess.