Why in the News?

As India completes eight years of implementing the Goods and Services Tax (GST), the focus has moved from its economic benefits to its problems, especially in public health, like the poor taxation of tobacco.

Why is GST ineffective in curbing tobacco use?

• Lack of Significant Tax Hikes Post-GST: Since the introduction of GST in 2017, there have been no major tax increases on tobacco products. In contrast, during the pre-GST era (2009–17), regular hikes in excise and VAT contributed to a 17% decline in tobacco use.
• Low Overall Tax Burden: The total tax on tobacco remains below the WHO-recommended 75% of retail price — only 22% for bidis, 54% for cigarettes, and 65% for smokeless tobacco. This allows tobacco products to remain affordable, especially for youth and low-income groups.
• Under-Taxation of Harmful Products like Bidis: Bidis, the most consumed smoked tobacco product, are exempt from the GST compensation cess. Despite causing harm similar to cigarettes, they generate very low tax revenue and are widely used by low-income populations, reducing the deterrent effect of taxation.
• Reduced Price Deterrence:  After GST, the share of excise duty fell sharply (e.g., from 54% to 8% for cigarettes), weakening the price-based disincentive for tobacco use.
• Industry Manipulation of Ad Valorem Taxes: GST relies heavily on ad valorem taxes (based on product price), which are easier for the tobacco industry to manipulate through pricing strategies. Without specific excise duties, companies can keep prices low, making harmful products like bidis and cheap cigarettes affordable to the masses.

What reforms can align tobacco taxes with health goals? (Way forward)

• Introduce or Increase Specific Excise Duties: Add a fixed per-unit tax (specific excise) on tobacco products along with GST. Eg: Countries like the Philippines combine ad valorem and specific taxes, leading to higher prices and lower consumption.
• Raise GST and Cess to Statutory Limits: Increase GST on tobacco to the legal ceiling of 40% and expand the GST Compensation Cess to include under-taxed products like bidis. Eg: Bidis, used by the poor and causing major health harm, are not covered under the cess, reducing their tax burdenand health deterrence.
• Link Tax Policy with Inflation and Income Growth: Regularly update tobacco taxes to offset rising incomes and inflation, preventing increased affordability over time. Eg: WHO recommends adjusting taxes annually so that tobacco doesn’t become more affordable even if incomes rise.

Mains PYQ:

[UPSC 2019] Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017.

Linkage: The article talks about the GST replaced many older taxes like VAT and excise duty, helping create a single national market. Although GST collections have steadily grown—reaching ₹22.08 lakh crore in 2024–25—the revenue from tobacco (about ₹551 billion a year) is much less than the huge cost of tobacco-related health problems, which is ₹2,340 billion every year.

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