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Will higher taxes deter Indians from tobacco use?

LiveMint logoLiveMint 26-07-2017 Soumya Gupta

Mumbai: Do higher taxes really deter Indians from consuming tobacco? Data on cigarette consumption shows otherwise.

High taxes on cigarettes are part of the government’s so-called ‘sin tax’ agenda that looks to deter people from consuming products including tobacco and carbonated drinks.

But the vast majority of India’s tobacco users over 18 years of age rely on gutkha (chewing tobacco), bidis and smuggled cigarettes, according to a study by research firm GlobalData Plc titled ‘Cigarettes in India, 2017’ published this month. India is home to 117.37 million smokers.

“In a country where levels of disposable income are rising but remain comparatively low, affordability is the single most important factor in the purchasing decision,” the report said. While the cigarette industry makes up only 11% of the tobacco consumed in India, it makes up for 85% of the total tax revenue generated by the tobacco industry, the report said.

“In contrast to the heavily taxed cigarette sector, bidis and chewing tobacco remain comparatively lightly taxed or untaxed,” the report said. “This is due in part to the largely artisanal nature of their production, which provides employment in many places, and to the difficulty of tax collection. Furthermore, their widespread consumption by the poorer rural people means that proposals to tax these products are widely interpreted as an attack on the poorer elements of the population, and are therefore neither politically nor socially popular.”

The per capita consumption of factory-made cigarettes remains low and declined to 73 pieces last year, a 26% drop from 1990, Christopher Victor, practice head at GlobalData Plc, said in an email reply to queries from . “Smoking is more prevalent in rural areas than urban areas for both men and women,” he said, adding that among total number of smokers 89.8% are men and 10.2% women.

On 17 July, the Indian government decided to hike the cess on cigarettes after realizing that the goods and services tax (GST) structure of 28% tax slab and 5% cess would effectively bring cigarette prices down. The cess was hiked by 27-30% across stick lengths to make up for the anomaly, according to an 18 July note by financial services firm Nomura.

“Our assessment shows that this tax hike should be neutral to marginally negative (for cigarette manufacturers). The intent of the government clearly seems to be to correct the anomaly rather than to penalise the sector. The pre-GST effective taxation on cigarettes was around ~65% (including value added tax, excise duty and cascading taxation), which has now been revised upwards by ~10%. Our assessment is that an average 5% price hike would be required to offset the impact,” Nomura said.

This promptly led the country’s largest cigarette maker ITC Ltd to hike prices by 4-8% across its popular categories including Gold Flake and Classic. ITC had a 76% share of India’s factory made cigarette market by volume in 2016, according to GlobalData.

“A substantial illegal market of 23 billion pieces or 20.2% of overall consumption was reported in 2015 and 2016, comprising tax-evaded smuggled and counterfeit products cigarette consumption,” the report said. “The latest industry reports indicate that the problem is still growing following further excise increases.”

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