How India's tax system helps heavily taxed cigarettes flourishNew Delhi: In March 2015 - in response to a drop in sales as taxes more than doubled over four years - India's leading cigarette company ITC Ltd. shortened its discount Bristol-brand cigarettes by 5
New Delhi: In March 2015 - in response to a drop in sales as taxes more than doubled over four years - India's leading cigarette company ITC Ltd. shortened its discount Bristol-brand cigarettes by 5 mm.
That allowed Bristol cigarettes to make use of India's complicated six-tier cigarette-tax system and fit into the lowest tax bracket. So, a pack of Bristol costs the same as before.
Cigarette-smokers comprise 39 percent of India's smokers according to the Global Adult Tobacco Survey (GATS) 2010, but - as the first part of this series explained - they are taxed up to 210 times more than smokers of bidis, whose manufacturers tend to have greater political clout than cigarette companies.
Cigarette companies argue that taxes have hit demand, as this Bloomberg report explains, but they have substantial wriggle room thanks toIndia's complex tax structure, which categorises them by length and filter.
The effect of such manipulation is that despite a 1,606 percent (for the shortest non-filter cigarettes) and 198 percent (for the shortest filter cigarettes) rise in taxes over 19 years, the number of cigarette smokers has risen.
Cigarette smokers in India increased from 25 million to 46.4 million over 14 years (1996 to 2010), and per capita annual consumption of cigarettes declined marginally, from 101 to 96 cigarettes over the same period.
The result is that cigarettes are part of a health crisis - encompassing cancer, respiratory and cardiovascular diseases and tuberculosis - that in 2011 cost India Rs 104,500 crore ($15.90 billion). That is more than the combined nationwide state and central government spending on healthcare that year.
India's convoluted cigarette tax structure
Cigarettes were 175 percent more affordable in 2011 than in 1990, and tobacco has become five percent more affordable in India since 2008, according to the WHO, all because real incomes have been growing at a faster clip than taxes on cigarettes.
India levies excise duty on cigarettes per stick. A six-tier (seven-tier until 2014) structure defines taxes per 1,000 cigarettes, depending on the length of the stick and the presence or absence of a filter.
Currently, excise duty varies between Rs. 1.28 per stick and Rs. 3.37 per stick. States levy additional value-added tax (VAT).
The World Health Organisation's Report on the Global Tobacco Epidemic 2015 criticises India's tobacco tax structure for being complicated and, therefore, difficult to administer.
Multiple slabs allow manufacturers to keep prices intact despite tax raises, which defeats the very purpose of hikes.
The Indian government should also pull out all the stops in using cigarette taxes as a means to improve public health.
A Public Health Foundation of India study shows that increasing taxes on cigarettes by 370 percent would cut consumption by 54 percent and increase government earnings by 115 percent.
However, India will see the best results from cigarette tax hikes when it eliminates the many-tiered tax structure, said experts.
Tax hikes would also have a better outcome if cigarette smokers didn't have cheaper options to switch to: illegal cigarettes, let alone bidis (although bidi and cigarette smokers are usually different sets of people).
Illegal cigarettes include smuggled foreign and domestically-manufactured tax-evaded cigarettes.
“Domestically-manufactured tax evaded illegal filter cigarettes are available for as little as rupee one, a third of the price of the cheapest legal cigarette possible,” said Syed Mahmood Ahmad, director of the Tobacco Institute of India.
India is the world's fifth-largest market for illegal cigarettes, according to Euromonitor International.
“Illegal cigarettes account for 20 percent of the market and cost the exchequer Rs.7,000 crore worth of taxes,” said Ahmad. Disparate VAT rates across states cause wildly varying overall cigarette tax rates and boost inter-state smuggling.
While industry would like the government rationalise duties to reduce the illicit trade, a more effective way to boost health would be to introduce uniform value-added taxes on cigarettes and bidis across states. Cracking down on cigarette smuggling would help too.