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Tobacco and ‘Sin Tax’: How Effective Has India Been atRegulating Tobacco?EPW ENGAGE

Though regulation of a demerit good such as tobacco is recognised, the state’s stake in thetobacco market coupled with the labour that still depends on it for livelihood makes such aregulation a murky business.

In her speech for the Union Budget 2020, Finance Minister Nirmala Sitharaman proposed toincrease excise duty on cigarettes, by way of increasing the National Calamity ContingentDuty on cigarettes and other tobacco products (with the exception of bidis). However,commenting on the increase in the National Calamity Contingent Duty (NCCD), the TobaccoInstitute of India observed that the increase would incentivise illegal cigarette tradeoperators in the country.

In the current economic environment the proposed increase announced in theUnion Budget on NCCD will aggravate the pressure on the legal cigaretteIndustry, encourage illegal cigarette trade and adversely impact tobaccofarmer earnings whose livelihood is intrinsically connected with the legalcigarette value-chain.

This increase in excise duty on cigarettes comes shortly after the union cabinet’s ban on e-cigarettes in September 2019, which was promulgated via the prohibition of e-cigarettesordinance in 2019. Sitharaman had then commented on the ban, saying it was “envisionedas a tool to combat tobacco addiction …”

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However, the ban on e-cigarettes last year and the subsequent increase in taxes oncigarettes in 2020 raises a series of questions regarding the effectiveness of suchlegislation. This is especially so when taking into account the fact that cigarettes make uponly a small part of the tobacco market. According to the Tobacco Market in India(2018-2023) Report, in 2017–18, bidi and cigarettes constituted 8% of the market share,whereas non-cigarette tobacco, such as chewables etc, had a 69% market share.

Additionally, doubt is raised over the veracity and genuineness of the government’sconcerns when accounting for the value of tax revenues from the sale of cigarettes as wellas the government’s stake in the tobacco market. First, though legal cigarettes account forabout 10% of overall consumption, they are responsible for 86% of tax revenues, which thegovernment enjoys. Hence, a surge in e-cigarette sales and a dip in the sale of normalcigarettes would deprive the government of an important source of tax revenue. Second, thebiggest cigarette producer in India, Indian Tobacco Company (ITC) currently enjoys thehighest market share of 84.27%, based on sale. Here, the government benefits directly fromthe ban on e-cigarettes, as the state itself has a significant stake in ITC. That is, state-ownedcompanies like Life Insurance Corporation of India together hold a stake of over 28.6% inITC, giving the government a vested interest in furthering the agenda of the company andeliminating competition.

In this reading list, we explore EPW archives to probe further into the state’s role inregulating a demerit good, such as tobacco, as well as the efficacy of the regulation that hastill now been executed in India.

Should the State be Regulating Tobacco?

The primary debate on tobacco regulation is whether there should be any. According togovernment sources, an estimated Rs. 13,517 crore is spent on tobacco-related illnesses.Moreover, in 2018, tobacco claimed 9.5% of all deaths in India. Given the healthrepercussions of the good, regulation is required. But, to what extent? Regulation ontobacco raises questions about the extent to which the state should intervene with theinterests and free choice of its citizens, if any at all. Sukumar Mukhopadhyay begins hisexamination of the regulation surrounding tobacco in the northeast with the assertion that

Cigarettes and pan masala are supposed to be demerit goods. They are evencalled ‘sin‘ goods and the tax on them is called sin-tax. But they are also themilch cows for the revenue department. A large chunk of tax revenue comesfrom them. So when revenue tinkers with the law relating to them it should benot only under the belief that they are potential sin but also the realisation thatrevenue comes from them. While giving exemptions and withdrawing them acertain background must be kept in mind.

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Thus, arguing for the regulation of tobacco by the state for the purpose of revenuegeneration and industrial development, Mukhopadhyay observes that the state’s location-specific exemption of excise duty has, in fact, hindered industrial development in theregions. He comments,

The government has not learnt from history. The example of manufacture ofcigarettes in Sikkim should have been a lesson for it. After Sikkim became partof India, excise duty was not chargeable on goods, including cigarettes, thatwere manufactured there till the early eighties. That did not lead to anyindustrial development of Sikkim. As soon as duty became chargeable, allfactories folded up. After this experience the government should have thoughthard before giving location-based exemptions. The lesson has not been learntand the excise tariff is replete with location-based exemptions, for Jammu andKashmir, the north-east and Kutch (Gujarat).

How Effective has Taxation Been Till Now?

Chetana Chaudhuri and Pritam Datta critically examine taxes on tobacco products in Indiaand conclude that though the 2014–15 proposal by then Union Finance Minister Arun Jaitleyto increase specific excise duty on cigarettes in the range 11%–72% garnered muchattention and applaud, it lacked any serious effect. Taxation on tobacco products in India,when put under a microscope, have not actually made smoking tobacco a less affordableproduct. This is largely because there is differential taxation (that is, either differentialtreatment of different tobacco products or different tiers of the same product). Therefore, in2014–15 excise duty was increased to 72% only for cigarettes of length not exceeding 65mm and 11% on cigarettes of length 70 mm to 75 mm. This, however, when adjusted forinflation and for the various products in the market, had little effect on consumerbehaviour.

The much discussed 72% increase in tax is a matter of only two tiers ofcigarette, i e, unfiltered cigarette of length 60 mm to 65 mm and filteredcigarette of length less than 65 mm. Two tiers of length 75 mm to 85 mm andmore than 85 mm were merged together in 2014 resulting in a 21% increase intax in tiers of cigarettes of length 75 mm to 85 mm, whereas, the tax rateremains unchanged for the cigarettes of length more than 85 mm.Interestingly, increase in excise duty looks quite unimpressive, if we convert itinto constant 2004-05 price (i e, adjusted to inflation). Average (unweighted)nominal increase in excise duty on cigarette in 2014-15 is 29% whereas; realincrease of the same in 2004-05 prices is only 19%. The much-discussed 72%increase in excise duty on cigarette (filtered and unfiltered) of length 60 mm to65 mm becomes 58% if we consider inflation. There is a decline (8%) in real

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excise duty on cigarettes (filtered) of length more than 85 mm. Interestingly,other than cigarettes (filtered and unfiltered) of length 60 mm to 65 mm realincrease in excise duty on other tiers of cigarettes are less than 15%.

Cigarettes of different length are close substitutes. Greater increase in exciseduty in lower tier (length) as compared to higher tier will make higher tiermore attractive to smokers as a result of reduction in the price gap betweenthem. So this kind of differential increase in tax rate may lead to upwardproduct substitution and finally dilute the overall effect of tobacco taxation.

While taxation counts as an effective demand-side measure, Nayanatara S Nayak notes thatthe reducing tobacco supply poses a major task for the government. This is predominantlybecause a significant proportion of the population depends on tobacco for their livelihood.Therefore, Nayak notes, though letting go of revenue in the interest of public health may notbe difficult for the government, its repercussions on those that rely on tobacco for theirlivelihood is significant. Therefore, taxation must be simultaneously coupled with findingand promoting economically viable alternatives for tobacco workers, growers and individualsellers. In the present scenario, however, this has been proved tough.

Restricting the supply of tobacco is a complex issue in India because it is amulti-sectoral problem. Different regions grow different varieties of tobacco.Cultivating, processing, marketing, and exporting tobacco is a source oflivelihood for millions, including farmers, agricultural labourers, processors,bidi rollers, tendu leaf pluckers, and retailers; the majority of these workersare poor. Finding alternatives involves national- and state-level decisions withthe cooperation of tobacco-growing states, different ministries at the centraland state levels, farmers, and other stakeholders. Moreover, absorbingtobacco-dependent workers into different sectors requires proper planning.This requires data on the extent of dependent livelihoods, the availability ofresources to rehabilitate them, the nature of alternatives available, the kind ofsupport needed, etc… Without this data, it would be difficult for thegovernment to initiate a diversification plan. Currently, we do not haveaccurate figures on the number of people dependent on tobacco foremployment. There appears to be an overestimation of tobacco-dependentemployment in India, which magnifies the issue and makes it difficult for thegovernment to take early action.

What Would Ideal Tobacco Regulation Look Like in India?

Priya Mohan, Harry A Lando and Panneer Sigamani recount that an approximation of onemillion deaths can be attributed to smoking-related diseases on an annual basis in India.

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About 80% of these deaths occur in rural areas, with healthcare costs for tobacco-relatedillnesses (public and private) coming out to be Rs. 30,000 crore annually. In light of this,cessation of tobacco use would be the only practical way to significantly reduce morbidity-and mortality-related issues associated with tobacco use. However, they go on to observethat though India has ratified the World Health Organization Framework Convention onTobacco Control (WHO FCTC), execution of its provisions on the ground has beensuboptimal at best.

The authors recommend the implementation of comprehensive tobacco control programmes,inclusive of both price and non-price interventions, coupled with strong political will.Particularly, they observe, taxes are the most effective method of decreasing tobaccoconsumption. However, taxation must walk side by side with income growth.

Taxation policy should be in accordance with income growth, with annualsystematic inflation-adjusted increases built into the policy; otherwiseincreased affordability will lead to an increased consumption. In India, beediswere nearly three times more affordable in 2011 than in 1990, while cigaretteswere two times more affordable. Manufactured cigarettes are also displacingbeedis as a measure of affordability. In the Indian scenario, high consumptionof tobacco is due to easy availability, accessibility and affordability,exacerbated by a lack of health education and awareness as well as poverty.Tobacco control requires strong political will—to control tobacco production, toenforce strict regulations as stated in the Cigarettes and Other TobaccoProducts Act 2003, to be compliant with FCTC regulations and guidelines andto include increased and uniform taxation on smoking tobacco, with an equalconsideration on taxing smokeless tobacco.

Read More:

Tobacco: Incoherent Policy | EPW Editorials, 2002

Tobacco Use: An Urgent Health Concern | A V Ramana Kumar, 2001

Tobacco vs Development: Private Spending on Tobacco in Gadchiroli District | Abhay Bang,Dharav Shah, Mahesh Deshmukh, Santosh Sawalkar, Yogeshwar Kalkonde, 2013

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Social Media Image Credit: Modified. Canva.

ISSN (Online) - 2349-8846