Since GST’s introduction, there have been minimal rate hikes on harmful products like tobacco and sugar-sweetened beverages, making them more affordable. The GoM’s proposal to raise GST from 28% to 35% is a positive step towards curbing consumption.
| Facts and Figures:India is the second-largest consumer of tobacco globally, with 28.6% of adults above 15 years and 8.5% of students aged 13 to 15 years using tobacco in some form.Tobacco is a leading risk factor for non-communicable diseases (NCDs) and causes over 3,500 daily deaths in India. The annual economic burden of tobacco use and second-hand smoke was estimated at ₹2,340 billion in 2017, or 1.4% of GDP—far exceeding the ₹538 billion collected annually in tobacco tax revenue. |
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Potential Impact of Proposed GST Rate Hike
The proposed GST hike to 35% is expected to:
- Tobacco Consumption Impact:
- Beedis: A 5.5% increase in price is projected to reduce consumption by 5% while increasing revenue by 18.6%.
- Cigarettes: Prices would rise by 3.9%, leading to a 1.3% decline in consumption and a 6.4% revenue boost.
- Smokeless Tobacco: A 3% price increase could decrease consumption by 2.7% and raise revenue by 1.9%.
- These changes, if implemented, could collectively generate an additional ₹43 billion annually.
- Sugar-sweetened beverages: These are a major contributor to obesity, diabetes, and other non-communicable diseases (NCDs). India’s rising burden of NCDs has significant implications for healthcare costs and workforce productivity.
- Potential Benefits of GST Rate Increase
- Discourage excessive consumption, particularly among younger populations.
- Align with India’s broader public health objectives by addressing the root causes of diet-related illnesses.
- Reinforce global trends in using fiscal policies to combat obesity and diabetes.
Need for a Higher Tax Rate
- The GoM’s recommendation to raise GST rates to 35% is a positive step but falls short of the 40% peak rate allowed under GST law.
- A 40% rate would have a greater impact, leading to sharper price increases, larger consumption reductions, and an additional ₹72 billion in revenue.
- It could also reduce the disparity in taxes across tobacco products and bring the tax structure closer to a more equitable distribution. Otherwise, people may shift to products with lower taxes.
- The World Health Organization Framework Convention on Tobacco Control (WHO FCTC), to which India is a signatory, recommends that all tobacco products be taxed comparably to prevent substitution between them.
| Currently, the tax burden on tobacco products is uneven:Beedis: Taxes account for 22% of the retail price.Cigarettes: Taxes account for 49.5%.Smokeless Tobacco: Taxes account for 64%. |
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Associated Concerns
Potential for Increased Smuggling and Black Market Activity: The tobacco industry expresses concerns about increased illicit trade due to higher taxes.
- However, evidence, including from India, shows that tax hikes have minimal impact on illicit trade.
- Factors such as tax administration quality, regulatory frameworks, government commitment, governance strength, social acceptance, and informal distribution networks play a far more significant role in determining the scale of illicit markets.
Way Forward
1. Adopt a Mixed Tax Structure
- Pair ad valorem GST rates with specific excise taxes for better effectiveness in reducing consumption.
- Ad valorem taxes are tied to product prices and can be manipulated by the industry. Specific excise duties, which are based on quantity, offer a more stable and impactful means to discourage usage.
- Raising excise taxes alongside GST rates would create a balanced taxation model, aligning with global best practices.
2. Increase GST Rates to 40%
- The GST Council should consider increasing the rates for tobacco and sugar-sweetened beverages to the peak 40% rate allowed under GST law.
- This would lead to sharper price increases, reduce consumption significantly, and generate higher revenue.
3. Implement Targeted Excise Taxes for Sugar-Sweetened Beverages
- Introduce a specific excise tax on sugar-sweetened beverages in addition to the GST hike.
- This would strengthen the health focus by directly targeting products linked to obesity, diabetes, and other non-communicable diseases (NCDs).
- It would also complement India’s broader public health goals.
5. Focus on Revenue Utilization for Public Health
- Direct a portion of the additional revenue from higher taxes toward funding public health initiatives.
- Invest in programs for NCD prevention, health education, and treatment infrastructure.
- This would amplify the long-term benefits of the tax reforms by addressing health impacts comprehensively.
6. Periodic Tax Reviews and Adjustments
- Establish a mechanism for regular reviews of GST and excise taxes on harmful products.
- Ensure that taxation keeps pace with inflation and changing consumption patterns.
- Guard against the industry’s ability to manipulate product prices or shift the tax burden.
Conclusion
Steps like raising the GST on tobacco and sugar-sweetened beverages is a positive move to curb consumption and improve public health. However, supplementing this with specific excise taxes would enhance effectiveness, reduce disparities, and generate greater revenue.
| Q. Critically analyse the impact of higher GST rates on the consumption patterns of tobacco products and sugar-sweetened beverages. To what extent can taxation be effective in addressing related public health issues? (15 M, 250 words) |
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