Taxation

The tobacco consumption pattern in India is unique in that only 11% of total tobacco is consumed in the form of Legal Cigarettes. The balance 89% is consumed in other forms such as chewing tobacco, zarda, bidi and illegal cigarettes. This is unlike the rest of the world where tobacco consumption is synonymous with cigarettes which account for as much as 90% of total consumption.

Cigarettes bear the brunt of Tobacco Taxation in India

Despite a mere 11% share of consumption, Government collects 87% of its total tobacco revenue from legal cigarettes as per the data available for the year 2014-15. The reason for this distorted pattern of revenue collections is that cigarettes are subjected to high and discriminatory rates of taxation, as compared to other tobacco products.

Source: Ministry of Finance, Govt. of India and Industry estimates

On a per kg basis of tobacco consumption, cigarettes are taxed at Rs. 4159 per kg vis-à-vis Rs. 81 per kg for other tobacco products making tax incidence on cigarettes 51 times higher than other tobacco products. Consequently, over the last three decades, the legal cigarette share of total tobacco consumption in India has declined from 21% in 1981-82 to 11% in 2014-15. Overall tobacco consumption in the country has increased by 38% during this period.

Tobacco Consumption (Million Kgs./Percentage Share)

Year Legal Cigarettes Other Tobacco forms* Total*
1981 – 82 86
(21%)
320
(79%)
406
(100%)
2014 – 15 62
(11%)
500
(89%)
562
(100%)
Difference(%) -24
(-28%)
+180
(+56%)
+156
(+38%)

Source: USDA; Tobacco Board & Industry estimates
*Includes illegal cigarettes

Moreover, given the availability of cheap substitutes, there is a great deal of interchangeability and dual usage between consumers of cigarettes, bidis and other tobacco products.

While the legal cigarette industry in India is in the organized sector, has statutory oversight and is completely compliant with all regulations the bulk of tobacco consumed is largely produced in the unorganized sector which does not have compliance or enforcementThis large unorganized sector (estimated at  68% of overall tobacco consumption) pays little tax either due to tax exemptions or evasion. Consequently, while on the one hand revenue collections are being sub-optimized, more importantly, overall tobacco consumption is also increasing.

Cigarette taxes in India are the highest in the world

As a percentage of per capita GDP, Cigarette taxes (Excise Duty & State Taxes) in India, of the most popular price category, are amongst the highest in the world. As is apparent from the chart below, cigarette taxes in India (as a percentage of per capita GDP) are almost 14 times higher than in the USA; 9 times higher than Japan; almost 7 times more than China; 6 times higher than Germany; 5 times more than in Australia & 3 times more than in Malaysia & Pakistan and 2 times higher than in UK and Thailand. Consequently, cigarette prices in India, relative to per capita GDP, are also amongst the highest in the world.

Cigarette taxes as % of per Capita GDP; Tobacco taxes as percentage of per capita GDP

Tax includes Excise duty, VAT/State taxes
Source: ‘WHO Report on the Global Tobacco Epidemic, 2015-Raising Taxes on Tobacco’

The chart above clearly indicates that high taxes make cigarettes extremely unaffordable in India compared to other countries in the world. Moreover, it is preventing the Government from realizing the full revenue potential from tobacco.

As per the ‘WHO Report on the Global Tobacco Epidemic, 2015 – Raising Taxes on Tobacco’ released in July 2015, affordability of cigarettes in India was amongst the lowest. Affordability measured as a proportion of GDP per capita required to purchase 100 packs of 20 cigarettes of most sold brand, was as high as 10.82 for India compared to other countries as depicted below:

Cigarettes affordability in India/World; World Cigarettes affordability; Purchasing power of cigarettes

Source: ‘WHO Report on the Global Tobacco Epidemic, 2015 – Raising Taxes on Tobacco’

 GST Regime Increase Tax Burden on Cigarettes

The Goods and Services Tax (GST) was implemented in the country with effect from 1st July, 2017 replacing more than a dozen Central and State levies like excise duty, service tax and local sales tax or VAT etc.

In the case of Cigarettes, on which excise duty, VAT and other State level taxes were being levied previously, the highest GST rate of 28% is now being levied in addition to GST Compensation Cess and National Calamity Contingency Duty (NCCD).

At its meeting on 17th July 2017, the GST Council effected a steep increase in the compensation cess rates on various segments of Cigarettes. The incidence of tax as per the revised levy on cigarettes is not in keeping with the fundamental GST principle of Revenue Neutrality.

The revised cigarette tax rates translate to a weighted average increase of about 13% over the rates prevailing immediately prior to the imposition of GST. The cumulative growth in rates of tax on cigarettes, after cognising for the latest increase in rates of Cess, is a staggering 202% since 2011-12, i.e., the last 6 years.

The legal cigarette industry is already under intense pressure with volumes shrinking by more than 25% since 2012/13 in the wake of the high tax cost of duty-paid cigarettes and consequential spurt in the growth of illicit, duty-evaded cigarettes. The additional tax burden will put the legal industry in further distress, adversely impacting Indian Tobacco Farmers and Revenue Collection and will increase smuggling and illicit cigarette trade in the country.