The tobacco consumption pattern in India is unique in that only 9% of total tobacco is consumed in the form of Legal Cigarettes. The balance 91% 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 9% share of consumption, Government collects 80% of its total tobacco revenue from legal cigarettes.The reason for this distorted pattern of revenue collections is that cigarettes are subjected to high and inequitable taxation, as compared to other tobacco products, which are largely produced in the unorganised sector and are prone to tax evasion. As a result, revenue realisation by the Government on a per kg basis of Tobacco used in various product forms is 41 times higher on cigarettes than other tobacco products.
Source: Tax Revenue – Actuals for Cigarette Industry and estimates for others; Tobacco consumption – FAO; Tobacco Board
Note: Other Tobacco Products includes illegal Cigarettes
Consequently the legal cigarette share of total tobacco consumption in India has declined from 21% in 1981-82 to 9% in 2017-18, the latest year for which data is available. Overall tobacco consumption in the country has increased by 47% during this period.
Tobacco Consumption in India (Million Kgs./Percentage Share)
|Year||Legal Cigarettes||Other Tobacco forms*||Total*|
|1981 – 82||86|
|2017 – 18||52|
Source: USDA; Tobacco Board; Food and Agriculture Organization (FAO)
*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 enforcement. This 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 in India, of the most sold brand, are amongst the highest in the world as per the data presented in the WHO Report on the Global Tobacco Epidemic 2019. As is apparent from the chart below, cigarette taxes in India (as a percentage of per capita GDP) are almost 16 times higher than in the USA; 11 times higher than Japan; almost 7 times more than Germany; 6 times higher than China; 5 times more than Pakistan, 4 times more than Thailand; 3 times higher than in Australia, Malaysia & UK. Consequently, cigarette prices in India, relative to per capita GDP, are also amongst the highest in the world.
Source: Tax data – WHO Report on Global Tobacco Epidemic, 2019; Per Capita GDP – IMF
(Data for the year 2018)
The chart above clearly indicates that high taxes make cigarettes extremely unaffordable in India compared to other countries in the world. It also explains the low per capita cigarette consumption and the high incidence of other cheaper tobacco product forms in the country. Quite evidently this skewed reality also prevents the Government from realizing the full revenue potential from the tobacco sector.
As per the ‘WHO Report on the Global Tobacco Epidemic, 2019, affordability of cigarettes in India was very low compared to other countries. 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 13.49 for India as depicted below:
Higher percentage indicates lower affordability of Cigarettes
Source: WHO Report on the Global Tobacco Epidemic, 2019
The reason for this disparity and the low affordability of cigarettes in India is punitive taxation and the continuous tax increases that have been much ahead of inflation and the improvement in income levels in the country.
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) and Basic Excise Duty (BED).
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 tax incidence on cigarettes, after cognising for the latest increase in rates of Cess, has trebled between 2012-13 and 2017-18.
The legal cigarette industry is under intense pressure with volumes shrinking by around 24% between 2011-12 and 2017-18 in the wake of the high tax cost of duty-paid cigarettes and consequential spurt in the growth of illicit, duty-evaded cigarettes with the resulting adverse impact on Indian Tobacco Farmers and Revenue Collections.