|Year : 2020 | Volume
| Issue : 3 | Page : 304-307
Taxation and prices of smokeless tobacco products in India: A success story
Jagdish Kaur1, Rohini Ruhil2
1 Regional Adviser, Tobacco Free Initiatives (TFI), World Health Organisation, Regional Office for South-East Asia, New Delhi, India
2 PhD Research Scholar, Centre for Social Medicine and Community Health, School of Social Sciences II, Jawaharlal Nehru University, New Delhi, India
|Date of Submission||18-Mar-2019|
|Date of Decision||14-Oct-2019|
|Date of Acceptance||02-Jun-2020|
|Date of Web Publication||22-Sep-2020|
Centre for Social Medicine and Community Health, School of Social Sciences II, Jawaharlal Nehru University, New Delhi - 110 067
Source of Support: None, Conflict of Interest: None
| Abstract|| |
India is the second-largest consumer of tobacco in the world, second only to China. The World Health Organization's Framework Convention on Tobacco Control (WHO FCTC) is an evidence-based treaty which consists of demand reduction and supply reduction measures. Article 6 of the WHO FCTC requires the Parties to implement tax policies and where appropriate, price policies, on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption. The article aimed to analyze the association between taxation structures of smokeless tobacco (SLT) and the prevalence of SLT use at the country level. The article concluded that just as cigarettes, SLT taxes, and prices are also key factors in controlling the demand for SLT products. It calls for uniform taxation across all types of tobacco products for effective and sustained impact and also to prevent product substitution.
Keywords: Health economics, India, smokeless tobacco, tobacco prices, tobacco taxation, tobacco use
|How to cite this article:|
Kaur J, Ruhil R. Taxation and prices of smokeless tobacco products in India: A success story. Indian J Public Health 2020;64:304-7
|How to cite this URL:|
Kaur J, Ruhil R. Taxation and prices of smokeless tobacco products in India: A success story. Indian J Public Health [serial online] 2020 [cited 2022 Jan 21];64:304-7. Available from: https://www.ijph.in/text.asp?2020/64/3/304/295784
| Introduction|| |
Tobacco use remains the world's leading cause of preventable premature deaths, killing more than 8 million persons every year. The tobacco use contributes to poverty traps from diseases leading to household consequences. Tobacco addiction is concentrated among people with lower incomes and education. Not only do the poor tend to use tobacco more, there is some evidence to support that the harm caused by tobacco to them is greater.
The World Health Organization's Framework Convention on Tobacco Control (WHO FCTC) provides a strong, concerted response to the global tobacco epidemic and its enormous health, social, environmental, and economic costs. Article 6 of the WHO FCTC requires the Parties to implement tax policies and where appropriate, price policies, on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption. The WHO MPOWER technical package also advocates for raising taxes on tobacco as an evidence-based policy to reduce the demand for tobacco.
By adopting the United Nations Sustainable Development Goals, the countries have committed to achieving a 30% reduction in death rates from noncommunicable diseases such as cancer, stroke, diabetes, and heart disease by 2030, and reducing tobacco use is critical to reach this goal.
An increase in cigarette prices has been proven to be effective in reducing the number of smokers and the number of smoking-related deaths and also generating substantial new revenues worldwide. Higher tobacco prices also reduce smoking initiation among young people and help to stop them from becoming addicted to tobacco. The links between tobacco taxes, public health, and government revenues are not just theoretical. Between 2012 and 2014, over hundred governments used tobacco tax hikes to save lives and increase government revenues. Much of the recent evidence indicates that demand for tobacco products in low and middle-income countries (LMICs) is at least as responsive to price as demand in high-income countries (HICs) and likely more responsive. “A 10% increase in the price of cigarettes in HICs may be expected to decrease tobacco consumption by 4%, while in LMICs a 10% increase in price may be expected to decrease consumption by 5%.” Unfortunately, raising tobacco taxes remains one of the least implemented MPOWER policies, with only 14% of the world's population covered with the highest level of tobacco taxes implemented at the national level.
In addition to the gain in terms of improvement in health at all levels, increased revenue from tobacco taxes is available for sustainable health financing, especially crucial for low-resource settings where health sector funding is dismal. In the short run, higher tobacco tax revenues are expected to stem directly from increased excise tax rates, which are generally accepted as the best instrument to tax tobacco. In the medium to long term, the additional tax revenues may be associated with increased productivity and income, as well as higher life expectancy.
Tobacco use leads to more than a million lives lost every year in India. As per the Global Adult Tobacco Survey (GATS) 2016–2017 India, 28.6% of adults aged 15 year and above use tobacco in any form in India. The prevalence of smokeless tobacco (SLT) use (21.4%) is greater than smoking (10.7%) prevalence. The prevalence of SLT among men is 29.6% and among women is 12.8%. In addition, Global Youth Tobacco Survey (GYTS) 2009 revealed that 14.6% of 13–15-year-old students were using tobacco in India. As many as 11% of all male students surveyed were found to be users of SLT, while 6% of female students used SLT.
We have looked at tobacco taxation as an effective measure to reduce smoking prevalence and save lives in many countries. In most countries, overall tobacco taxes are regressive, meaning that a greater proportion of the tax is borne by the poorest versus richest current smokers. The effect of raised taxes and prices of SLT use prevalence needs to be examined widely.
| Taxation Structure in India|| |
Taxation on SLT products in India follows a compounded levy scheme (or presumptive taxation). Under this scheme, the manufacturer is required to pay a lump sum amount of duty per packing machine installed in the production facility. This is because most SLT products in India such as chewing tobacco, pan masala, and gutkha are packed in pouches with the aid of packing machines. The amount of duty thus levied would also depend on the retail price of the pouch/pack that is produced using that packing machine. Thus, the taxation was based on the normative assessment of production rather than actual declared production. Three types of duties such as Basic Excise Duty (BED), Additional Duty of Excise, and National Calamity Contingent Duty (NCCD) were imposed on SLT. The NCCD was introduced by the Finance Act of 2001 to provide financial resources for natural disasters. The Government of India (GoI) imposed NCCD at the rate of 10% on chewing tobacco, pan masala, and snuff tobacco, and this did not change between 2001 and 2013. Moreover, to provide financial resources for the National Rural Health Mission, in 2005, the Government imposed a new duty called health cess on pan masala and other tobacco products.
The BED on SLT products was 60% in 2012–2013 which was a 3.75 time increase from 16% in 2002–2003. The BED on gutkha and SLT increased to 70% in 2014. The GoI, in its budget for 2015–2016, made a maximum speed of packing machine as a factor for determining both the deemed production and excise duty payable under the compounded levy scheme. In 2016, there was a major increase in excise duty on SLT, and it increased to 81%.
| Taxation and Sales of Tobacco over the Years|| |
The retail value of sales of SLT is constantly decreasing since 2010. Moreover, the volume of SLT products sold is also constantly decreasing since 2010. In other words, people are buying less SLT products and/or lesser numbers of people are buying SLT products. The latter is supported by newly released GATS-2 data which shows that the prevalence of SLT use among both men and women has decreased. The prevalence of SLT use among men has decreased from 32.9% in 2009–2010 to 29.6% in 2016–2017 and among women from 18.4% in 2009–2010 to 12.8% in 2016–2017.
The excise taxes for chewing tobacco are raised during the budget at the beginning of the financial year, starting April. However, the effect of taxation on retail prices is reflected in phases which are spread across the year. This increase in prices is carried out in phases and in most cases absorbed through the profit margin as they carry high margins. Thus, the price rise appears to occur once every 2–3 years compared to cigarettes where rise happens more frequently, nearly every year. The pricing strategy remains the same across all states in India. It has also been noticed that there is not much variation in unit prices for brands across the country. However, manufacturers may price SLT products differently in each state, similar to the alcoholic drinks industry.
Thus, a rise in SLT taxation and prices over the years resulted in decreased consumption of these products reflected in decreased SLT volume in India and its decreased prevalence.
| Taxes and Prices Are Key Factors in Controlling the Demand for Smokeless Tobacco Products|| |
Thus, SLT taxes and prices are key factors in controlling the demand for SLT products and essential components of an integrated approach to tobacco control. Previous research has also proven that significantly increasing the excise tax and price of tobacco products is the single most consistently effective tool for reducing tobacco use.
The WHO recommends relying more on specific excise taxes on tobacco products which increase the consumer prices to a greater amount than ad valorem and also reduce the gap in prices between premium and low priced alternatives and thus limit the chances for users to switch over to low-cost tobacco products in response to tax increase. It may be emphasized here that ad valorem tax provides an opportunity to the manufacturers to be able to influence the tax by keeping the base price as low as possible. Thus, prices do not rise in spite of a high rate of tax. For this reason, designing the tax structure so that it will have maximum impact on prices is an important policy issue.
Differential increase in tobacco taxes and thus their prices across various states also resulted in some escape routes being used in the smuggling of tobacco products. Until 2000, Northeastern states were exempted from excise duty, and this tax holiday was abused by tobacco manufacturers by falsely labeling tobacco products as being manufactured in Northeast. Along with price differentials, strong preferences for some foreign brands also contribute to the smuggling of tobacco products. Thus, it becomes very important to implement compliance measures by tax authorities to combat illicit trade and ensure revenues. The ideal would be putting in place a state-of-the-art monitoring, tracking, and tracing system. However, other steps can also be introduced. First of all, the tobacco industry including bidis, SLT, and other indigenous tobacco products needs to be organized in a way that requires all the producers, importers, and exporters to register and get a license for production, distribution, and retail sales. Mandatory digital tax stamps on all tobacco products may provide an effective tracking and tracing system to reduce tax evasion so that the product can be traced back to its source. A digital tax stamp will distinguish a licit tobacco product from illicit ones, and the products that do not carry an authorized digital tax stamp would be considered as illegally produced or illicit ones. Furthermore, digital tax stamps allow the product to be traced to its original source of production. Such a system needs to be supported by an increased number of enforcement officers/investigators on the ground. Some other countries such as Malaysia and the UK have adopted similar tax monitoring systems and invested in strong measures which resulted in the control of illegal tobacco markets., There should be severe penalties for those caught engaged in the illicit trade of tobacco products. The way forward to put these monitoring mechanisms in place for India is to enforce the Protocol to Eliminate Illicit Trade in Tobacco (the Protocol) under the WHO FCTC.
Raised taxes on tobacco products generate additional revenue. The same could be earmarked toward improving public health services, especially for the poor. Some countries such as the Philippines, Nepal, and Thailand are already doing so. Nepal earmarks a part of the revenue generated from tobacco taxation for the Cancer Control programme. Thailand earmarks 2% of the total national tax revenues (earned from alcohol and tobacco products) equivalent to almost US$ 35 million per year to the Thai Health Promotion Foundation which supports groups and organizations working on public health issues. The Philippines earmark a portion of tobacco tax revenues for programs that help tobacco farmers and others employed in tobacco-dependent sectors make the transition to alternative livelihoods.
In India, there is a large proportion of out-of-pocket expenses on health which puts financial constraints on poor households, and thus, financing public health is the central issue of health-care reforms. The use of government revenues from tobacco taxes to pay for the health-care services might prove to be an innovation in health-care financing for a robust public health services system. Health has been recognized as a fundamental human right, and the Universal Health Coverage calls for leaving no one behind. Tobacco taxation in such a scenario will serve as a double-edged sword. First, it will help control the high prevalence of tobacco and second, earmarking revenues generated from tobacco taxation toward improving public health services will help to increase equity in health care, especially beneficial for the poor.
The tobacco taxes, to be effective, should be increased higher than the increase in incomes and also higher than inflation so that the tobacco products become less affordable. There is a need to establish a mechanism for automatically adjusting specific taxes to keep pace with inflation. Australia and New Zealand have already done this. Thus, there is a need to tax tobacco products higher in relation to other consumer goods and relation to inflation to make them less affordable. Tobacco taxation is regressive in nature which highly impacts poor tobacco users as compared to rich tobacco users. However, from a wider economic perspective, it is the poor who bear the heaviest burden of death and disease caused by tobacco use and thus gain the most from quitting tobacco as a result of higher taxes, making tobacco taxation progressive.
| Conclusion|| |
Although there is a declining trend of SLT use in India, a uniform taxation system is needed to sustain the gains, to counter the challenges of product substitution and increased affordability, and to maximize the public health impact of tobacco taxes.
There are certain challenges to bring the SLT industry under the ambit of a uniform specific taxation system. First, there is a large unorganized tobacco industry leading to revenue leakage, and organizing this industry to make it comply with Goods and Services Tax (GST) is a mammoth task. Second, ensuring a simple uniform excise across tobacco products is a challenge so that the new tax system does not encourage substitution for low-cost tobacco products. There are challenges of providing alternative livelihoods to tobacco farm workers, tobacco farmers, and workforce involved in tobacco packaging and retailers/sellers. Third, there is a need to tax SLT products higher in relation to other consumer goods and in relation to inflation to make them less affordable. Fourth, there are challenges of tax administration, enforcement, monitoring, and regulation. Putting in a strong and effective monitoring system through the Protocol might be a great leap forward to control rampant illegal SLT markets. Finally, there is a need to earmark tobacco tax revenue for improving the public health service system. How far the newly administered GST goes to effectively raise prices of SLT products to reduce affordability is yet to be seen.
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Conflicts of interest
There are no conflicts of interest.
The opinions or views expressed in this article are solely those of the authors and do not necessarily express the views or opinions of the organizations to which the authors are affiliated.
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