Will tax hike reduce tobacco consumption in India?
The Union Health Minister, Dr. Harsh Vardhan, recently said he “supports” higher taxes on cigarettes and other tobacco products. But even if he were to substantially increase the tax rates, will it make cigarettes and other tobacco products very expensive and hence reduce consumption?
In the case of India, as per the current taxation practices, increasing the tax component is quite unlikely to reduce consumption drastically. This is unlike the situation in the developed countries.
The paradox becomes clear only if certain basic elements are understood. Ever wondered why cigarettes are available in five different lengths (<65 65-70="" 70-75="" 75-85="" mm=""> 85 mm) in India? Or, why chewing tobacco products (such as pan masala) are available in different quantities? Why nearly 98 per cent of beedis available in the market are handmade though mechanisation is possible? Why the number of small-scale beedi manufacturers has reduced by more than 50 per cent with a concomitant increase in households involved in beedi rolling? Or why tobacco products have become a lot more affordable in the last decade despite tax increase?65>
Behold! Tobacco companies have remarkable ingenuity and lobbying to make sure their customer base remains intact even when taxes are raised. After all, high tax rates lead to reduced consumption, and they are fully aware of it. Hence, the tax structure for tobacco products in India has been made complex and provides much leeway for companies to escape the brunt of any tax hike.
Historically, taxes have been low for beedis compared with other tobacco products. 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.
The inconsequential tax rate on beedis goes against the grain of reducing consumption through higher taxation. That probably is the reason why beedi consumption in India constitutes 35-40 per cent of the total tobacco consumption. Its consumption is far greater than that of cigarettes.
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.