Introduction
India is unique in the range of tobacco products that are available at different price points, targeted at populations with substantial differences in socioeconomic and demographic profiles. Tobacco is consumed in a variety of forms, from smoking tobacco products like bidis* and cigarettes to several types of chewing tobacco. There are considerable differences in the taxes imposed on each of these product categories. Tobacco taxes are low overall in India, and are especially low for the products consumed most widely.
Tobacco use imposes a large burden of death and disability on the Indian subcontinent. Tobacco related deaths are increasing in India, and account for approximately a sixth of the world’s tobacco-related deaths. Smoking is expected to kill nearly 1 million Indians by the early 2010s, with the proximate causes running the gamut from heart disease and cancer to respiratory disease and tuberculosis.
Tobacco use patterns in India are unique and reflect longstanding cultural practices. Two features stand out — bidis are more common than cigarettes; and chewing tobacco use is widely prevalent. The diversity in forms of tobacco consumption complicates any assessment of tobacco taxation in India. Tobacco is also fairly important as an economic activity in India — its production and sale directly or indirectly involve some 7 million workers, and tobacco contributes roughly 2% of central tax revenue. India also has a mosaic of taxation approaches, mirroring a diverse tobacco manufacturing and legislative environment.
Against this complex economic background, increases in tobacco consumption and in the prevalence of tobacco-related illnesses and mortality only underscore the urgency of using policy interventions, including tobacco taxation, to improve public health in India.
Tobacco Control Environment in India
Scientific evidence on tobacco being a major cause of morbidity and mortality in the world and a growing awareness of the adverse health effects of tobacco use in India led to legislation for tobacco control in India in the mid 1970s, specifically the enactment of the Cigarettes Act of 1975. 7 Since then, the Indian government and civil society have made progress on tobacco control, although implementation lags far behind the introduction of interventions. Tobacco control advocates in recent years have stressed the need to focus on increased taxation of tobacco products in addition to bans on tobacco advertising and the deglamorization of smoking in visual media.
The Cigarettes and Other Tobacco Products Act (COTPA), adopted by Parliament in 2003, bans tobacco advertising and smoking in public places, forbids the sale of tobacco products to children under the age of 18, and restricts sponsorship of sports and cultural events by tobacco manufacturers. This Act superseded the 1975 Regulation of Production, Supply and Distribution Act, called The Cigarettes Act, which mandated the display of statutory warnings on cigarette packages and advertising. The 2003 Act prohibits the sale of tobacco products within a 100-yard radius of educational institutions, imposes a fine of up to Rs 200 (US$ 4.55) for smoking in public places and for the sale of tobacco products to minors, and requires hotels and restaurants with a capacity of more than 30 rooms or 30 seats respectively to have separate smoking and nonsmoking areas. The Act also prohibits smoking in public places such as health care facilities, educational facilities, government facilities, and indoor offices. Even though the 2003 Act was comprehensive, its implementation has been largely ineffective for many years. 11 Public smokefree provisions in the law have since been expanded and their enforcement has been stepped up beginning October 2008.
In 2004, India ratified the Framework Convention on Tobacco Control (FCTC), the global treaty adopted by the World Health Assembly in 2003. This treaty aims to curb tobacco use and reduce tobacco-attributable morbidity and mortality. In 2001, The Ministry of Health and WHO jointly established the National Tobacco Control Cell (NTCC) as a nodal agency to coordinate activities to curb tobacco consumption.
Health Consequences of Tobacco Consumption
There is a body of evidence in India and worldwide on the adverse health effects of tobacco consumption. Globally, 5.4 million deaths annually are caused by tobacco use, and it is expected that by the year 2030 about 80% of these deaths will be in developing countries. The leading causes of death from smoking are cardiovascular diseases, chronic obstructive pulmonary disease, and lung cancer. About one-half of deaths due to tobacco consumption occur in people aged 35 to 69, the period of life when individuals are most economically productive
Health care costs from tobacco use impose burdens on annual health budgets, especially in poor countries like India. By one estimate, India spent approximately Rs 300 billion (US$ 6.2 billion)* in 2002-03 in public and private spending on the treatment of tobacco-related illnesses. If accurate, this would amount to roughly one-fourth of all health spending in the country — as a point of comparison, tobacco-related health spending tends to amount to 6-15% of health spending in other developing countries. Another study using nationally representative health care expenditure data found that the direct cost of treating four major tobacco related diseases (respiratory, tuberculosis, cardiovascular, and neoplasms) in India amounted to Rs 54 billion (US$ 1.2 billion) in 2004, or 4.7% of India’s national health care expenditure that year.
Central Government Excise Taxes
The central government imposes excise taxes that are collected at the manufacturers’ level. These taxes typically take the form of value added taxes (i.e., producers receive a credit for excise taxes paid on inputs). The amount of each type of tax imposed in turn depends on the type of tobacco product. Two aspects of these taxes are noteworthy — the categories under which exercises are imposed, and the form (specific or ad valorem) that these exercises take.
Specific and ad valorem excises
Cigarettes of various lengths and filter type are taxed by the Central government at different specific rates, as are bidis. Tobacco products other than cigarettes and bidis are taxed on an ad valorem basis, at a percentage rate based on retail price.
Economic Rationale for Tobacco Taxation
India presents a mixed landscape for tobacco taxation. Most tobacco products are taxed in India, but taxes tend to be very low for the forms of tobacco that are most commonly used — bidis are a particularly notable instance of undertaxed tobacco products. Tobacco taxation thus remains a promising and underutilized policy intervention for tobacco control in India.
The tobacco industry worldwide has held that increased taxation on tobacco is inefficient and unwarranted. The basis for such a position rests not only in a resistance to regulation, but also in the belief that smokers consume tobacco with full information about its health consequences, and that they take into account the costs and benefits associated with its consumption. In practice, however, the market for tobacco products is characterized by market failures. There is an “information failure” about the health risk associated with tobacco consumption — some consumers do not have full knowledge of risks while yet others might be aware of the health consequences, but underestimate the risk of addiction to tobacco. Smoking also imposes external costs on non-smokers and society more broadly. A variety of diseases, including cancer, are known to be caused by secondhand smoke. External costs of tobacco use can also take other forms such as deforestation resulting from the extensive use of wood in flue-curing tobacco, fire hazards from discarded cigarette and bidi ends, and the costs of cleaning cigarette and bidi litter and chewed tobacco spittle from public places.
The consumption of tobacco thus entails a variety of costs that are often beyond the perception of smokers. Research on households in India has also uncovered evidence that spending on tobacco crowds out expenditures on food and education. 17 Economic theory suggests that all these circumstances make it appropriate for governments to intervene in the tobacco market. Taxation is one of the most effective ways to counter tobacco consumption.
Cigarette smoking is the leading cause of preventable disease in the United States. According to the Centers for Disease Control and Prevention, it accounts for about 443,000 deaths each year, or about 20 percent of all deaths. (Some 50,000 of these premature deaths are from secondhand smoke.) The Surgeon General estimates that approximately half of today’s 44.8 million smokers will die prematurely from smoking-related diseases
Tobacco taxes are low overall in India, and are especially low for the products consumed most widely.
Tobacco control efforts in India are at a relatively early stage. The Cigarettes and Other Tobacco Products Act adopted by Parliament in 2003 bans tobacco advertising and smoking in public places, forbids the sale of tobacco products to children under the age of 18 and restricts sponsorship of sporting and cultural events by tobacco manufacturers. India has signed (in 2003) and ratified (in 2004) the global Framework Convention on Tobacco Control (FCTC) treaty adopted by the World Health Assembly in 2003. Compliance with these regulations and guidelines, however, remains less than optimal.
The tobacco economy in India is large compared to most other countries. It employed some 7 million people during 2004-05, accounting for 1.5% of overall employment. More than two-thirds of this employment is rural, though many of these jobs, particularly those in bidi manufacturing, are primarily part-time.
Taxes on cigarettes are low, while taxes on bidis have historically been close to zero in rupee terms. The result is that tobacco products have become increasingly affordable in India over the past decade. Significant and sustained increases in taxes across all tobacco products would dramatically reduce tobacco consumption, mortality, and morbidity while also raising substantial government revenues. Research shows that a 10% increase in cigarette prices would reduce cigarette consumption by 3.4% in rural India and 1.9% in urban India, while a 10% rise in bidi prices would reduce bidi consumption by 9.2% and 8.5% in rural and urban India, respectively. These price increases together translate into a 1.7% and 11.7% decrease in youth cigarette and bidi smoking prevalence.
The health impact of a bidi price increase of 52.8% through increased taxes would be 4.6 million averted premature deaths in current smokers, while a cigarette price increase of 176% through increased taxes would avert an additional 1.8 million premature deaths in current smokers. Given the low average prices of both bidis and cigarettes, neither of these percentage increases is a very large price change in rupee equivalents. The benefits of these price increases, however, are substantial. In addition to deaths averted among current smokers, by deterring the current cohort of Indian youth from initiating smoking, an additional 10.9 million premature deaths caused by bidi smoking and 1.6 million premature deaths caused by cigarette smoking could be prevented. Reassuringly, two broader economic trends — the fast-growing economy and the demand for non-tobacco goods when households shift away from tobacco consumption — make it unlikely that these higher taxes would threaten aggregate employment levels. At the same time, these cigarette and bidi price increases would generate Rs 146.3 billion (US$ 3.1 billion) and Rs 36.9 billion (US$ 0.8 billion) in new government revenues respectively
Extensive research shows that tobacco taxes reduce smoking and extend lives. An examination of more than 100 international studies articulates the empirical consensus: “Significant increases in tobacco taxes are a highly effective tobacco control strategy and lead to significant improvements in public health.
Smoking is a habit that tends to start early in life. Four in five adult smokers started before they were 18; only one in 100 started after age 26. A primary reason that cigarette taxes are so effective is that young people are particularly sensitive to price increases. The Congressional Budget Office (CBO) summarizes the existing research and concludes that a 10 percent increase in cigarette prices will lead people under age 18 to reduce their smoking by 5-15 percent. Among adults over 18, CBO concludes, the decline would be 3-7 percent (see Figure 1). Taking the mid-point of the estimate for youth suggests that each 1 percent price increase leads to roughly a 1 percent decrease in youth tobacco consumption. (Approximately half of the decline in smoking is due to fewer smokers (people either quitting or not starting to smoke), while the other half is due to fewer cigarettes consumed by people who smoke.)
Some opponents note that a tobacco tax increase would be regressive. They point out that low-income people have higher smoking rates: 29 percent of poor adults smoke, compared to 18 percent of non-poor adults. Also, expenditures for cigarettes account for a greater share of lower-income households’ budgets
If tobacco only harmed smokers, and if people were fully aware of its health costs, the rationale for tobacco taxes would be less powerful. However, several considerations support taxation as a mechanism to reduce tobacco use. First, its numerous health risks impose costs on non-smokers as well as smokers, both because they raise overall U.S. health care spending and because even secondhand exposure to cigarette smoke raises the risk of cardiac disease. In addition, evidence suggests that people do not fully account for the health risks of smoking and that many smokers would like to quit.
Raising taxes on tobacco
Raising taxes on tobacco products which lead to increases in their price makes tobacco less affordable. When tobacco becomes less affordable people use it less and youth initiation is prevented. Because youth and low-income groups are more responsive to increases in tobacco prices, they disproportionately enjoy the health and economic benefits of quitting and not starting.
Saving lives with tobacco taxes lessens the enormous healthcare burden and economic losses that result from tobacco-related disease. Tobacco taxation is also relatively inexpensive to implement and generates significant revenues over the short and medium term.
WHO supports all its Member States in using tobacco taxes to meet their health, revenue and equity objectives.
Best practices in tobacco taxation policy include:
Recommendations
Increase bidis taxes substantially.
Taxes on bidis should be raised multifold. Raising bidi taxes to Rs 98 per 1000 bidi sticks from the existing low level of Rs 14 per 1000 would raise over Rs 36.9 billion (US$ 0.77 billion) in new tax revenues. By increasing prices up 52.8% from their current levels, the higher tax would also significantly reduce bidi consumption, and prevent 15.5 million premature deaths among current and future bidi smokers.
Tighten policies regulating bidi production.
Effective tobacco taxation in India is hampered by regulatory distinctions between handmade and machine-made bidis, exemptions to small producers and the availability of unbranded bidis. Eliminating the small producer exemptions (or limiting it to truly small manufacturers), prohibiting the sale of unbranded bidis, and ensuring that all bidi tobacco raw material sales to manufacturers are reported to the excise department are all critical steps, especially in an environment where large bidi manufacturers own or effectively control smaller production units to take advantage of regulatory loopholes.
Increase cigarette taxes substantially.
A significant increase in the existing tax on cigarettes will reduce cigarette smoking and the public health damage it causes, as well as generate higher cigarette tax revenues. Raising cigarette taxes to Rs 3691 per 1000 sticks from Rs 659 per 1000 would increase tax revenues by Rs 146.3 billion (US$ 3.1 billion), significantly reduce cigarette consumption, and prevent 3.4 million premature deaths in current and future cigarette smokers.
Simplify, extend, and strengthen tobacco taxation
The current tobacco tax structure is complex — cigarettes are taxed based on their length; and differential taxes on hand- versus machine-rolled bidis make for a large market in very cheap tobacco products. Eliminating these differential taxes and simplifying tax administration will help convey the clear public health message that all bidis, cigarettes and chewed tobacco products are harmful. A higher specific tax which is regularly adjusted for inflation would ensure high relative prices of tobacco products. This calls for an increased central government excise tax on bidis and cigarettes, and high taxes at the state level. India has recently begun to move towards the introduction of a goods and services tax. As the tax environment evolves, policy-oriented research to assist tax administration and ensure high taxes on tobacco products is especially critical.
Tobacco use kills eight million people every year and is the leading cause of preventable deaths globally. Evidence shows that significantly increasing tobacco excise taxes and prices is the single most effective and cost-effective measure for reducing tobacco use.
Conclusion
Significant strides have been made in reducing smoking over the past three decades, particularly in high-income countries. Nevertheless, the health toll of smoking remains a compelling global health challenge. Concerted efforts are needed to reach a higher summit in tobacco control, especially with subpopulations at most risk.
The economic literature has made unique and important contributions to our understanding of the effectiveness of tobacco taxation on ameliorating the health consequences of smoking. Increased tobacco taxes, passed on to consumers in the form of higher cigarette prices, provide an economic disincentive to those who smoke or may be contemplating smoking. Indeed, the evidence from this knowledge synthesis strongly supports increasing cigarette prices through tobacco taxation as a powerful strategy for achieving major reductions in smoking behavior among some, but not all, high-risk populations.
For instance, increasing the price of cigarettes is a very effective policy tool for reducing smoking participation and consumption among youth, young adults and persons of low socioeconomic status. In contrast, major gaps exist in our knowledge about the impact of price on persons diagnosed with mental health or non-nicotine substance abuse disorders, heavy and long-term smokers, and Aboriginal people. Given their high prevalence of smoking, urgent attention is needed to develop effective tobacco control policies for these subpopulations. A related issue is whether or not increased prices have an effect on reducing smoking initiation among youth and young adults.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
