Tax Rate on Tobacco Hike: Committee lies Dormant, Unlikely to Submit Report Soon

The committee formed in October 2021 to suggest a rise in tobacco taxation in India has been quiet since then and is unlikely to produce a report any time soon, as per source.

The nine-member team, chaired by the health ministry’s assistant secretary, is entrusted with reviewing current tobacco taxes and developing a strategy to raise them in accordance with World Health Organisation (WHO) principles in order to reduce demand.

The committee includes officials from the GST Council, NITI Aayog, the Central Board of Indirect Taxes and Customs (CBIC), the revenue department’s Tax Research Unit, the WHO national office for India, and the National Institute of Public Finance and Policy (NIPFP).

According to sources, “The committee is dormant. Chairman has not convened any meeting for a very long time now, about a year. Without a meeting, you cannot expect any report to be submitted. The intent was shown in forming the committee, but after that no progress.”

The Indian government is being pushed to boost the National Calamity Contingent Duty (NCCD), GST cess, and ad valorem taxes by 10% each in order to raise the entire tobacco tax above per capita income and inflation rise. The effective burden on consumers will be determined by the tax hike and cigarette businesses’ increases in retail pricing.

Despite WHO recommendations that tobacco products be taxed at least 75%, the effective rate on cigarettes in India is 52.7% and beedi is 22%. Tobacco taxes have increased very little in the last five years. The tax burden on tobacco products is substantially below the WHO recommendation of 75%. Since the implementation of the GST, India has lagged in tobacco taxation, with no revisions. As a result, tobacco products in India have gotten more inexpensive.

The NCCD received a slight modification in this year’s budget, but it was inconsequential. The increase in NCCD for cigarettes was just 16%, and because the NCCD accounts for only 10% of the total cigarette tax, the actual overall tax increase was only 1.5%. Prior to the introduction of the GST, Union budgets would regularly raise cigarette excise duty. With GST, however, this is not the case. Tobacco is subject to a 28% GST rate, and the cess can be increased under GST. Currently, the cigarette cess is determined by the length of the cigarette, ranging from Rs 4,170 per 1,000 cigarettes + 36% ad valorem to Rs 2,076 per 1,000 sticks plus 5%.

Meanwhile, the Indian government and public sector enterprises own substantial holdings in tobacco corporations such as ITC. The government owns 7.86% of ITC through the Specified Undertaking of the Unit Trust of India (SUUTI), while LIC owns 15.27% of ITC as of December 2022. Other insurance companies with a stake in ITC include New India Assurance Company, which owns 2.07% of the company, General Insurance Corporation of India, which owns 1.84 percent, Oriental Insurance Company, which owns 1.64 percent, and National Insurance Company, which owns 1.57 percent.

Furthermore, despite being India’s most popular tobacco product, no cess is levied on beedi. There is no compelling public health rationale to exclude beedi from the cess. As a result, worries persist, and the government is doing little to address them.

The parliamentary standing committee on Health noted in a report filed in Parliament in December 2022, “India has one of the lowest prices for tobacco products, and there is a need to increase tobacco taxes.” As a result, the Committee proposes that the government raise tobacco taxes and use the additional funds for cancer prevention and awareness.”

According to a WHO report, as many as 38 nations, accounting for 14% of the world population, had sufficiently high tobacco taxes of at least 75% of the cost in 2018.