Tobacco and ‘Sin Tax’: How Effective Has India Been at Regulating Tobacco?

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

In the current economic environment the proposed increase announced in the Union Budget on NCCD will aggravate the pressure on the legal cigarette Industry, encourage illegal cigarette trade and adversely impact tobacco farmer earnings whose livelihood is intrinsically connected with the legal cigarette 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-cigarettes ordinance in 2019. Sitharaman had then commented on the ban, saying it was “envisioned as a tool to combat tobacco addiction …” 

However, the ban on e-cigarettes last year and the subsequent increase in taxes on cigarettes in 2020 raises a series of questions regarding the effectiveness of such legislation. This is especially so when taking into account the fact that cigarettes make up only 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’s concerns when accounting for the value of tax revenues from the sale of cigarettes as well as the government’s stake in the tobacco market. First, though legal cigarettes account for about 10% of overall consumption, they are responsible for 86% of tax revenues, which the government enjoys. Hence, a surge in e-cigarette sales and a dip in the sale of normal cigarettes would deprive the government of an important source of tax revenue. Second, the biggest cigarette producer in India, Indian Tobacco Company (ITC) currently enjoys the highest market share of 84.27%, based on sale. Here, the government benefits directly from the ban on e-cigarettes, as the state itself has a significant stake in ITC. That is, state-owned companies like Life Insurance Corporation of India together hold a stake of over 28.6% in ITC, giving the government a vested interest in furthering the agenda of the company and eliminating competition. 

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

Should the State be Regulating Tobacco?

The primary debate on tobacco regulation is whether there should be any. According to government 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 health repercussions of the good, regulation is required. But, to what extent? Regulation on tobacco raises questions about the extent to which the state should intervene with the interests and free choice of its citizens, if any at all. Sukumar Mukhopadhyay begins his examination of the regulation surrounding tobacco in the northeast with the assertion that 

Cigarettes and pan masala are supposed to be demerit goods. They are even called ‘sin‘ goods and the tax on them is called sin-tax. But they are also the milch cows for the revenue department. A large chunk of tax revenue comes from them. So when revenue tinkers with the law relating to them it should be not only under the belief that they are potential sin but also the realisation that revenue comes from them. While giving exemptions and withdrawing them a certain background must be kept in mind.

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

The government has not learnt from history. The example of manufacture of cigarettes in Sikkim should have been a lesson for it. After Sikkim became part of India, excise duty was not chargeable on goods, including cigarettes, that were manufactured there till the early eighties. That did not lead to any industrial development of Sikkim. As soon as duty became chargeable, all factories folded up. After this experience the government should have thought hard before giving location-based exemptions. The lesson has not been learnt and the excise tariff is replete with location-based exemptions, for Jammu and Kashmir, 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 India and conclude that though the 2014–15 proposal by then Union Finance Minister Arun Jaitley to increase specific excise duty on cigarettes in the range 11%–72% garnered much attention 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 affordable product. This is largely because there is differential taxation (that is, either differential treatment of different tobacco products or different tiers of the same product). Therefore, in 2014–15 excise duty was increased to 72% only for cigarettes of length not exceeding 65 mm and 11% on cigarettes of length 70 mm to 75 mm. This, however, when adjusted for inflation and for the various products in the market, had little effect on consumer behaviour. 

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

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

While taxation counts as an effective demand-side measure, Nayanatara S Nayak notes that the reducing tobacco supply poses a major task for the government. This is predominantly because 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 not be difficult for the government, its repercussions on those that rely on tobacco for their livelihood is significant. Therefore, taxation must be simultaneously coupled with finding and promoting economically viable alternatives for tobacco workers, growers and individual sellers. In the present scenario, however, this has been proved tough.

Restricting the supply of tobacco is a complex issue in India because it is a multi-sectoral problem. Different regions grow different varieties of tobacco. Cultivating, processing, marketing, and exporting tobacco is a source of livelihood for millions, including farmers, agricultural labourers, processors, bidi rollers, tendu leaf pluckers, and retailers; the majority of these workers are poor. Finding alternatives involves national- and state-level decisions with the cooperation of tobacco-growing states, different ministries at the central and state levels, farmers, and other stakeholders. Moreover, absorbing tobacco-dependent workers into different sectors requires proper planning. This requires data on the extent of dependent livelihoods, the availability of resources to rehabilitate them, the nature of alternatives available, the kind of support needed, etc… Without this data, it would be difficult for the government to initiate a diversification plan. Currently, we do not have accurate figures on the number of people dependent on tobacco for employment. There appears to be an overestimation of tobacco-dependent employment in India, which magnifies the issue and makes it difficult for the government 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 one million deaths can be attributed to smoking-related diseases on an annual basis in India. About 80% of these deaths occur in rural areas, with healthcare costs for tobacco-related illnesses (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 observe that though India has ratified the World Health Organization Framework Convention on Tobacco Control (WHO FCTC), execution of its provisions on the ground has been suboptimal 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 tobacco consumption. However, taxation must walk side by side with income growth.

Taxation policy should be in accordance with income growth, with annual systematic inflation-adjusted increases built into the policy; otherwise increased affordability will lead to an increased consumption. In India, beedis were nearly three times more affordable in 2011 than in 1990, while cigarettes were two times more affordable. Manufactured cigarettes are also displacing beedis as a measure of affordability. In the Indian scenario, high consumption of 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, to enforce strict regulations as stated in the Cigarettes and Other Tobacco Products Act 2003, to be compliant with FCTC regulations and guidelines and to include increased and uniform taxation on smoking tobacco, with an equal consideration 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