COMMENTARY

in price be sufficient to discourage consumption of tobacco products?

Tobacco Taxation

Background
Pritam Datta, Chetana Chaudhuri

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.

Pritam Datta (pritam.datta@phfi.org) is
associated with Public Health Foundation
of India, New Delhi. Chetana Chaudhuri
(chetana.chaudhuri@gmail.com) is associated
with National Institute of Public Finance and
Policy, New Delhi.

20

S

moking 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: 7880). 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.
The Government of India increased
tax rates in the range of 11% to 72%
across different product tiers (lengths of
cigarettes) in 2014. But how would this
increase in the tax rate translate into
prices? And would the resultant increase

A major anti-tobacco initiative – Cigarette
and Other Tobacco Products Act (COPTA),
20032 – was introduced in India to prohibit smoking in public places, advertisement, promotion and sponsorship of all
tobacco products, sale to minors, mandatory health warnings on tobacco products,
and regulation of contents of tobacco
products. However, tobacco taxation, it is
argued, is paramount to a successful strategy that promotes public health, reducing
tobacco consumption, while generating
government revenues (WHO 2011b: 27).
In India, most tobacco manufacturing
units (99.8%), which generate 30%3 of
the gross value added (GVA) from tobacco
products, are in the informal sector and
thereby outside the tax web and other
regulatory mechanisms. This includes
99.9% of beedi manufacturing units,
contributing 56% of GVA from beedi
manufacturing. Excises and value added
tax (VAT) are the most common forms of
taxation levied on domestic consumption of tobacco products in India, with
excise taxes constituting a greater share
of tobacco product prices.
Smoking tobacco (cigarettes, beedi,
etc) and smokeless tobacco (zarda, snuff,
etc) products are subject to specific excise duty and ad valorem excise taxes
respectively.4 Excise tax on cigarettes
and beedis are levied on a per-thousandsticks basis, and the rates are different
for different tiers in India. Lengths and
filters define tiers for cigarette manufacturing. For beedis there are only two tiers,
hand-rolled and machine-made beedis.
Beedi accounts for around 85% of total
smoking tobacco consumption in India
but excise tax duty is only Rs 12 and Rs 30
per thousand sticks of hand-rolled and
machine-made beedis, respectively. Additionally, hand-rolled beedi manufacturers who do not have any brand name,
with a production limit of 20 lakh sticks
per year, are totally tax exempted.5
Taxes and Cigarette Prices
The prices of tobacco products that
consumers face and the total tax share
in consumers’ price varies considerably

january 10, 2015

vol l no 2

EPW

Economic & Political Weekly

More titles will be added gradually. https://itunes. 30% of GVA from tobacco products is generated in informal sector and thereby outside the tax web and other regulatory mechanism. Moreover. Likewise. Excise duty has been increased to 72% on cigarettes of length not exceeding 65 mm and 11% on cigarettes of length 70 to 75 mm. Interestingly. unfiltered cigarette of length 60 mm to 65 mm and filtered cigarette of length less than 65 mm. etc) from 60% to 70%.and collegegoing students often take advantage of buying a single cigarette as a majority of them cannot afford buying entire packs or do not prefer to carry packets with them. tax was only 43% (and excise tax is only 26. increase in excise duty looks quite unimpressive. 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. whereas. there is no proposal of increment in tax rate in beedi. Windows of Opportunity: Memoirs of an Economic Adviser (BY K S KRISHNASWAMY) (http://www. A closer look suggests that the nominal increase of excise duty per pack of 10 sticks is only Rs 2 to Rs 6 (i e. tax (excise and VAT together) is only 45% to 55% and much below the World Bank’s two-third yardstick (67% of price as total tax).amazon. The tax share in retail prices in lower-middle income countries (45%) and in the lowincome countries (39%) are below the global average (50%) (WHO 2011b: 30).apple. we have shown that this alleged increment in tax rate would not be able to make smoking tobacco a less affordable product because of its obvious loopholes in the differential treatment of different tobacco products or different tiers of the same product. India is one amongst the three southeast Asian countries that have the lowest share of tax in retail price of cigarettes. excise duty is implemented mainly on cigarettes of length not exceeding 65 mm (72%) and of length 70 mm to 75 mm (11%).amazon. Conclusions The proposal of increase in the specific excise duty on cigarettes in the range of 11-72% in 2014-15 has attracted a lot of attention. It ignores the category where length is greater than 85 mm. and other chewing tobacco (zarda. 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.apple. Assam. Surprisingly there is no change in excise duty on handmade and machinemade beedi manufacturing. Environment. In this article. Thus.4%) of maximum retail price (MRP) of the most popular brand of cigarette in India and far below than the World Bank’s two-third yardstick6 (67% of price as total tax).amazon.com/dp/B00CS624E4 . The much discussed 72% increase in tax is a matter of only two tiers of cigarette. The titles are 1. if we convert it into constant 2004-05 price (i e. vol l no 2 21 . Other than a few states like Rajasthan and Uttar Pradesh. real increase of the same in 2004-05 prices is only 19%. adjusted to inflation). Whereas VAT8 rates9 on cigarette differ across states from 13% in states like Madhya Pradesh. which accounts for around 85% of the total smoking tobacco consumption in India. Union Finance Minister Arun Jaitley proposed to increase the specific excise duty on cigarettes in the range of 11%-72%. Economic & Political Weekly EPW january 10. the tax rate remains unchanged for the cigarettes of length more than 85 mm. https://itunes. 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. Uttarakhand to a maximum of 50% in states like Rajasthan and Uttar Pradesh. to discourage adolescent smokers excise tax per stick should be high enough to make even a single stick of cigarette unaffordable.COMMENTARY across countries and regions. i e.apple. the excise duty on pan masala has been increased from 12% to 16%. Interestingly. SURINDER JODHKA) (http://www. Delhi. Maharashtra.com/us/book/windows-of-opportunity/id640490173?mt=11) Please visit the respective sites for prices of the e-books.com/dp/B00CS62AAW . which is a window of substitution of smaller cigarettes by the larger ones. https://itunes. 2015 Cigarettes of different length are close substitutes. ROHAN D’SOUZA) (http://www. respectively. First.com/us/book/village-society/id640486715?mt=11) 2. Chandigarh. Andhra Pradesh.com/dp/B00CS622GY . Bihar. The prevailing excise tax duty on beedi is only Rs 12 and Rs 30 per thousand sticks of hand-rolled and machinemade ones. There is a decline (8%) in real excise duty on cigarettes (filtered) of length more than 85 mm. In 2012. Third. 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%.com/us/book/environment-technology-development/ id641419331?mt=11) 3. So this kind of differential increase in tax rate may lead to upward product substitution and finally dilute the overall effect of tobacco taxation. And it is common that school. Village Society (ED. snuff. excise duty has become roughly 25% to 35% of MRP of most of the popular brands of filtered cigarette in India. Second. Technology and Development (ED.7 A survey (Firstpost 2013) shows that 87% of smokers buy loose cigarettes compared to the mere 13% who buy packets. of unmanufactured tobacco from 50% to 55%. per stick increase in tax is 24 to 57 paisa only). etc) have 20% VAT on cigarettes. hence EPW E-books Select EPW books are now available as e-books in Kindle and iBook (Apple) formats. Average (unweighted) nominal increase in excise duty on cigarette in 2014-15 is 29% whereas.10 But most of the states (Jharkhand.

Proper implementation of evidencebased tax policies would be more effective in covering informal sectors. Anand (2014): “Himachal Pradesh to Ban Sale of Loose Cigarette”. M D Apte • Glynn L Wood • D P Chaudhri. the World Bank announced a yardstick after observing that the tax accounts for twothirds to four-fifths of the retail price of cigarettes in countries with comprehensive tobacco control policies. with the due consideration of inflation. S Shariff and A Gilmore (2008): “Economics of Tobacco Taxation in Russia”. the impact of reservation. not more than 58%. The story of higher education in India has seen many challenges over the decades and has not been without its share of problems. 4 A specific excise tax is a monetary value per quantity whereas. World Health O­rganization. there would be no loss in revenue. Health Policy and Planning. nominal increase in per pack of 10 sticks (of various lengths) is only Rs 2 to Rs 6. Authors: André Béteille • Shiv Visvanathan • Suma Chitnis • Satish Deshpande • K Sundaram • Rakesh Basant. References ADB (2012): Tobacco Taxes: A Win-Win Measure for Fiscal Space and Health.com Mumbai • Chennai • New Delhi • Kolkata • Bangalore • Bhubaneshwar • Ernakulam • Guwahati • Jaipur • Lucknow • Patna • Chandigarh • Hyderabad Contact: info@orientblackswan. Firstpost.3 per stick. issues of inclusiveness.com/corporate/13-things-you-maynot-know-about-indian-smokers-46021. 7 Real increase after union budget 2014-15 is 2 to 16 paisa per stick of cigarette. 10 Himachal Pradesh government is also planning to increase VAT on cigarettes from existing 36% up to 50% (Bodh 2014). Quality and Quantity Edited by Jandhyala B G Tilak India has a large network of universities and colleges with a massive geographical reach and the facilities for higher education have been expanding rapidly in recent years. World Health Organization.in/excise/cxt2013-14/ chap24. Higher Education in India In Search of Equality. Inter­ national Union against Tuberculosis and Lung Disease. Finally. Per stick increase in prices is 24 to 57 paisa only.cbec. Promotion and Sponsorship”. National Journal of Medical Research. Bodh. this increase in tax rate. 200-09. – (2009): “Economics of Tobacco Taxation in Ukraine”. No 3. HNP discussion paper. John (2008: 10) has shown that even if tax on beedi is increased to Rs 100 per thousand sticks and the tax on an average cigarette is increased to Rs 3. Enforces Ban on Tobacco Advertising. Sonaliya. which is also behind other countries in terms of tax rates on tobacco. Notes 1 See WHO (2013) India profile here: http:// www. 2003. The policy initiative must increase the tax to an extent which would ensure significant increase in the price of the product for each stick.html Hu T-W and T Mao (2002): “Economics Analysis of Tobacco and Options for Tobacco Control: China Case Study”. Potluri Rao • R Gopinathan Nair. – (2011b): “WHO Technical Manual on Tobacco Tax Administration”. even after the implementation of 72% tax. International Union against Tuberculosis and Lung Disease.COMMENTARY encouraging greater consumption. dwindling numbers of faculty. In reality.pdf?ua=1 2 Cigarette and other Tobacco Product Act (COPTA). For most of the states. H Z. http://firstbiz. firstpost. WHO (2011a): “Systematic Review of the Link b­etween Tobacco and Poverty”.gov. 2015  vol l no 2  EPW   Economic & Political Weekly . the articles in this volume discuss. 8 Other than the central government. shortage of funds. R M (2008): “Price Elasticity Estimates for Tobacco in India”. Rama Joglekar • Karuna Chanana • Saumen Chattopadhyay • Samuel Paul • Deepak Nayyar • V M Dandekar • M Anandakrishnan • Thomas Joseph Orient Blackswan Pvt Ltd www. Firstpost (2013): “13 Things You May Not Know about Indian Smokers”. D Ajit • D T Lakdawala. Vol 23. Fourth. Gitanjali Sen • Jayati Ghosh • Thomas E Weisskopf • Lloyd I Rudolph. ad valorem excise tax is levied as a percentage of the value of the tobacco products. Ross. and unemployment of the educated young. the Indian states are assigned the power to levy VAT since March 2006 9 VAT rates are from Tax Manuals of various states. World Bank and World Health Organization. both for cigarette or beedi. Pp xiv + 538  Rs 745 ISBN 978-81-250-5131-2 2013 Drawn from writings spanning almost four decades in the EPW. 5 http://www. Asian Development Bank.who. though is quite high in aggregate terms. total tax (excise and VAT together) is only 45% to 55% of MRP and is much below the World Bank’s two-third yardstick. translates into a minuscule increase in price of the cigarettes. the 72% figure looks quite smaller.com 22 january 10. K R Shah • Chitra Sivakumar • Amrik Singh • Jandhyala B G Tilak • Anindita Chakrabarti. – (2013): “WHO Report on the Global Tobacco Epidemic.pdf 6 In 1999. World Health Organization. Susanne Hoeber Rudolph • A M Shah • Errol D’Souza • G D Sharma. Economics of tobacco control no 3.orientblackswan. 3 Estimated from ASI unit level data 2010-11. Paris.int/tobacco/surveillance/policy/ country_profile/ind. Paris. 10 July. the most serious being a very high degree of inequity. 2013. No 3. among other things. and the impact of the increase as a tool of discouraging smoking is questionable. The Times of India. 243-44. so that both the width and depth of the tax-coverage increases. John. Manila. So there is ample scope to increase the price of tobacco products in India. problems of mediocrity. Vol 2. K N (2012): “The Economics of Tobacco in India”.