ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Tobacco Taxation

The tax hikes on smoking tobacco in 2014 appear large in the aggregate, but have little effect on the price of single cigarette sticks, a popular mode of retail in India. Analysing the seemingly large tax hikes on smoking tobacco, it is argued that taxes can and must go higher to ensure substantial increases in single cigarette stick prices.

Smoking tobacco is a global health hazard and the situation is quite alarming, especially in poor and developing countries. India is home to 10% of the world’s tobacco smokers, representing the second largest group of smokers after China (Sonaliya 2012: 243). A report by the World Health Organization (WHO 2011a: 22) revealed that people with low income smoke more than those with high income. Smoking, being an addiction, affects household decision-making and gender balance while spending already scarce household resources (ADB 2012: 2).

Recent studies suggest that the most cost-effective tobacco control strategy is increasing the price of tobacco products by raising tobacco tax (WHO 2013: 44). Ross, Shariff and Gilmore (2008, 2009) argued that choosing an excise tax that represents at least 70% of the retail price will make a difference with respect to lives saved as well as taxes gained. But in 2012, only 8% of people on the globe (530 million people in 32 countries) were subject to tax rates sufficiently high – constituting 75% of the retail price of cigarettes (WHO 2013: 78-80). According to their estimates,1 in 2012, excise duty accrues only 24.4% of retail price (Rs 98) of a pack of 20 of the most popular brand of cigarette in India. Studies (Hu and Mao 2002: 11-14; John 2008: 19 quoted in WHO 2011b: 21) have estimated a wide range of price elasticities for tobacco products, indicating that demand is more responsive to price in low- and middle-income countries than it is in high-income countries. John (2008) estimates price elasticity in the range of -0.87 (urban) to -0.91 (rural) for beedis, and -0.18 (urban) to -0.41 (rural) for cigarettes in India. In other words, if the price goes up by 10%, consumption will go down by 8%-9% for beedis and 2%-4% for cigarettes in India.

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