GST at 8, Strong Revenue Gains, But Tobacco Taxation Still a Major Concern

GST at 8, Strong Revenue Gains, But Tobacco Taxation Still a Major Concern

Why in News

As India completes eight years of the Goods and Services Tax (GST) regime since its implementation on July 1, 2017, there is a need to reassess its progress. While GST has succeeded in revenue generation and simplifying tax compliance, public health experts have raised concerns over India’s inadequate taxation on tobacco products — an area critical for health policy and economic efficiency.

Introduction

The GST was envisioned as a transformative reform replacing a complex structure of indirect taxes such as VAT, excise duties, and service tax, under the “One Nation, One Tax” framework. Since its rollout, GST has improved logistics, simplified tax administration, and significantly boosted national revenue. Gross GST collections for FY 2024–25 stood at ₹22.08 lakh crore — a 9.4% year-on-year growth.

However, despite these fiscal successes, there are serious shortcomings in the realm of public health, particularly in the taxation of tobacco — a known health hazard with massive social and economic costs.

Key Issues and Background

• India’s Tobacco Burden:
  Over 3,500 Indians die daily due to tobacco use, with economic costs exceeding ₹2,340 billion annually. India is the world’s second-largest tobacco consumer with 28.6% of adults and 8.5% of teenagers consuming some form of tobacco.

• Low Taxation on Tobacco:
  Despite being a major health risk, tobacco taxation has seen no significant increases under GST compared to the pre-GST period (2009–17). The share of central excise in total tobacco taxes has declined:

  • From 54% to 8% for cigarettes

  • From 16% to 11% for bidis

  • From 59% to 1% for smokeless tobacco

  This decline is attributed to GST’s reliance on ad valorem taxes (percentage of value) rather than specific taxes, which are more effective in curbing consumption.

• Disproportionate Burden:
  Though cigarettes account for only 15% of tobacco users, they generate over 80% of tax revenue. Meanwhile, cheaper and widely consumed tobacco forms like bidis are taxed minimally, allowing usage to persist among low-income groups.

Specific Impacts or Effects

1. Public Health Crisis:
   The lack of effective taxation has allowed tobacco use to remain high, despite India being a signatory to the WHO Framework Convention on Tobacco Control (FCTC).

2. Price Affordability:
   As per WHO standards, India’s tobacco product prices remain below recommended affordability thresholds. For instance, taxes comprise only:

   • 22% of retail price for bidis

   • 54% for cigarettes

   • 65% for smokeless tobacco
     This is far below WHO’s suggested 75% benchmark.

3. Illicit Trade Argument is Weak:
   Industry claims that higher taxes increase illicit trade are largely unfounded. Peer-reviewed studies show India’s illicit tobacco market is just 2.7% to 6.6% — far below industry claims of 25%.

4. Global Commitments Ignored:
   Despite ratifying the WHO Protocol to Eliminate Illicit Trade in Tobacco, India has failed to strengthen enforcement and regulatory frameworks.

Challenges and the Way Forward

1. Correct Structural Flaws:
   The current reliance on ad valorem taxation allows pricing manipulation and under-taxation of harmful products. A mix of specific and ad valorem taxes must be adopted.

2. Reintroduce Specific Excise Duties:
   For tobacco control, specific taxes are more predictable and impactful. Reintroducing or increasing central excise can help meet both health and fiscal goals.

3. Target Bidis and Smokeless Tobacco:
   These are the most under-taxed and widely consumed products among the poor. Higher taxation here would directly target vulnerable populations.

4. Boost Enforcement:
   Strengthening tax enforcement will address illicit trade without compromising taxation goals.

5. Adopt Recommendations from Parliamentary Committees:
   The 139th report (Sept 2022) of the Parliamentary Standing Committee noted that India’s tobacco is among the cheapest globally and recommended a 40% statutory tax rate to make tobacco less affordable.

Conclusion

India’s GST reform has delivered remarkable economic dividends. But public health — especially tobacco control — remains its unfinished business. With eight years of experience and the upcoming GST review, now is the time to realign the taxation system to meet both health priorities and fiscal needs. Addressing the glaring gaps in tobacco taxation will reflect India’s commitment to a healthier future and a more equitable tax policy. As the country prepares for the next round of GST rationalisation, a structural correction in tobacco taxation should be non-negotiable.

5 Questions and Answers

1. What is the key concern raised about GST in the article?
Despite revenue success, the GST system has failed to significantly raise tobacco taxes, particularly on bidis and smokeless tobacco, undermining public health.

2. Why are specific taxes on tobacco considered more effective than ad valorem taxes?
Specific taxes reduce price manipulation and ensure a fixed cost on harmful products, discouraging consumption more effectively.

3. How much do cigarettes and bidis contribute to the tobacco tax revenue and user base?
Cigarettes account for 15% of users but contribute over 80% of revenue, while bidis are widely used but minimally taxed.

4. What does WHO recommend regarding tobacco taxation?
WHO recommends that taxes should form at least 75% of the retail price of tobacco products — India falls short on this.

5. What is the way forward suggested by experts?
Introduce a mix of specific and ad valorem taxes, raise taxes on all tobacco products (especially bidis), improve enforcement, and align taxation with public health goals.