Tobacco Taxation

The tobacco consumption pattern in India is unique in that only 9% of total tobacco is consumed in the form of Legal Cigarettes. The remaining 91% consumption is in the form of illegal cigarettes and 29 other tax-inefficient tobacco products such as bidis, chewing tobacco, khaini etc. 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 2019-20. Overall tobacco consumption in the country has increased by 46% during this period.

Tobacco Consumption in India (Million Kgs)

Source: USDA; Tobacco Board; Parliament Committee Report 2020
*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 Increases Tax Burden on Cigarettes

The Goods and Services Tax (GST) regime, introduced in July 2017, increased the tax burden on Cigarettes by increasing the GST Compensation Cess rates by a weighted average of about 13% over the pre-GST tax rates.  Incidence of taxes on cigarettes after accounting for the GST Cess increase has more than trebled since 2012-13. The highest GST rate of 28% is levied on cigarettes in addition to the GST Compensation Cess, National Calamity Contingent Duty (NCCD) and Basic Excise Duty (BED).

The Union Budget for 2019-20 imposed BED at the rate of Rs. 5 to 10 per thousand sticks for various length segments of Cigarettes, which was earlier ‘Nil’. Further, the Union Budget for 2020-21 increased NCCD on cigarettes and other tobacco products. Accordingly, the NCCD on Cigarettes increased across all length segments ranging from Rs. 200 per thousand sticks (earlier Rs. 90) on the lowest length segment to Rs 735 per thousand sticks (earlier Rs. 235) on the highest segment.

The legal cigarette industry is under intense pressure with volumes shrinking by around 18% between 2011-12 and 2019-20 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 Government’s Revenue Collections.