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Context
- India marks the 8th anniversary of the Goods and Services Tax (GST) on July 1, 2025.
- GST, launched in 2017 under the motto ‘One Nation, One Tax,’ unified India’s complex indirect tax system.
- While GST improved economic efficiency and administrative ease, its tobacco taxation framework shows significant shortcomings.
Goods and Services Tax (GST): Key Achievements
- Replaced multiple indirect taxes such as VAT, service tax, and excise duties, streamlining tax collection.
- Created a common national market, improving ease of doing business and interstate trade.
- Digitisation efforts (e.g., e-way bill) enhanced transparency and reduced tax evasion.
- Improved logistics efficiency, cutting transportation times by up to 20%, lowering costs.
- Gross GST collections for 2024-25 reached ₹22.08 lakh crore, a 9.4% growth from the previous year.
- GST remains a crucial pillar of India’s fiscal system.
Fault Lines in GST’s Structure
1. Tobacco Taxation and Public Health
- Tobacco use causes over 3,500 deaths daily in India and costs the economy ₹2,340 billion annually (~1.4% of GDP in 2017).
- GST has not significantly increased tobacco taxes, undermining efforts to reduce consumption.
- Pre-GST (2009–2017), regular excise and VAT hikes led to a 17% drop in tobacco use.
- Post-GST, tobacco taxes have stagnated, making tobacco products more affordable.
- Average GST revenue from tobacco over the past 5 years is ₹551 billion, far lower than related health and economic costs.
- Tax burden on tobacco is below WHO’s recommended 75% of retail price:
- 22% on bidis
- 54% on cigarettes
- 65% on smokeless tobacco
2. Structural Flaws: The Ad Valorem Trap
- GST relies heavily on ad valorem taxes (based on product value), which can be manipulated to keep tobacco prices low.
- Fixed specific excise taxes (levied per product unit) are more effective in reducing tobacco use.
- Since GST’s start, the share of specific excise duties in tobacco taxation dropped significantly:
- Cigarettes: from 54% to 8%
- Bidis: from 17% to 1%
- Smokeless tobacco: from 59% to 11%
- Bidis, the most consumed smoked tobacco product and equally harmful, are under-taxed and exempt from GST compensation cess.
- This disproportionately benefits economically disadvantaged consumers and worsens health inequity.
The Way Forward
1. Dual Strategy for Reform
- Need to align public health priorities with fiscal policy in tobacco taxation.
- Increase GST rates on tobacco to the statutory maximum of 40%.
- Significantly raise specific excise duties alongside GST increases.
- A mixed tax system (ad valorem + specific) is proven globally to reduce consumption and increase revenue.
2. Addressing Illicit Trade Concerns
- Tobacco industry claims that higher taxes increase illicit trade lack evidence.
- Studies show illicit cigarettes account for only 2.7% to 6.6% of India’s market, far lower than the industry’s 25% claim.
- Regulatory enforcement and border controls are more effective at controlling illicit trade than pricing.
- India has ratified the WHO Protocol to Eliminate Illicit Trade in Tobacco Products and must focus on its strict implementation.
Conclusion
- GST reform discussions must prioritize public health, especially tobacco taxation.
- The 139th Parliamentary Standing Committee (2022) emphasized the affordability of tobacco products in India and urged higher taxes.
- The GST’s 8th anniversary is an opportunity to strengthen GST not just as an economic tool, but also as a social responsibility instrument.
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