Does India impose enough tax on cigarettes to check consumption? An insight

Tobacco consumption in any form is injuries to health. Despite knowing that tobacco contributes to a significant number of early deaths and high healthcare costs, the demand for tobacco products has remained inelastic. India is also the second largest producer and consumer of tobacco, according to the World Health Organisation. But do you know, the price you pay for a cigarette stick or other similar products is much higher than the production cost?

A packet of a cigarette that costs Rs 330 for 20 sticks has more than 50 per cent of the tax component in it that the manufacturer pays to the government. Interestingly, the prices are not as per international standards set by the WHO and thus the scope for the policymakers to tinker with the prices of cigarettes remains open.

Although tobacco products fall in the highest GST slab of 28 per cent in our country and attract additional taxes, levies on cigarettes fall far behind the WHO's recommendations. Besides GST, government slaps additional taxes on tobacco products, taking the total tax incidence on cigarettes to as much as 52.5 per cent. This is why tobacco products including cigarettes, cigar, alcohol and other items are sold at a much higher rate than their production cost. 

As per the National Health Mission's official website, India is among 181 countries that signed the WHO framework convention on tobacco control. It recommends at least 75 per cent tax on the retail price of all tobacco products including cigarettes. However, the taxes being levied on cigarettes in India is lower than that recommended by the WHO.

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In the Union Budget 2023-24, Finance Minister Nirmala Sitharaman increased excise duty on tobacco, by way of increasing the National Calamity Contingent Duty (NCCD) on cigarettes. NCCD is simply a sin tax that is imposed on products or services that could be harmful to the public. The government imposes a sin tax on such products to make them unaffordable, thus discouraging consumption.

NCCD is a duty of excise levied on certain goods specified under the Seventh Schedule of Finance Act, 2001. It is in addition to any other duties of excise chargeable on such goods under the Central Excise Act, 1944 (1 of 1944) or any other law for the time being in force. NCCD is levied on cigarettes based on their size.

NCCD is levied per 1,000 cigarette sticks and is a part of the total tax on tobacco. The overall tax on cigarettes includes GST, NCCD and compensation cess, accounting for more than 52 per cent. With the latest hike in NCCD, the overall tax on cigarettes will be around 52.5 per cent, which remains far behind the WHO's recommendation.

It is believed that the most effective way to check tobacco use is to raise the price of tobacco through tax. Higher prices discourage youth from smoking and also encourage current smokers to quit.

According to Centrum Broking, the latest change in NCCD rate in the Union Budget would have little or no impact on the profitability of the manufacturers.

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As per the latest rates of excise duty, tax on every 1,000 cigarette sticks of length (excluding the filter) not exceeding 65 mm would be hiked to Rs 230 from Rs 200. Likewise, 1,000 cigarette sticks of length (excluding the filter) exceeding 65 mm and below 70 mm would be taxed Rs 290.

Every 1,000 filter cigarettes having a length not exceeding 65 mm and filter cigarettes of length exceeding 65 mm but below 70 mm would be taxed Rs 510. Filter cigarettes of length exceeding 70 mm but below 75 mm would be taxed Rs 630. Other cigarettes and cigarettes of tobacco substitutes would be taxed Rs 850 and Rs 690, respectively.

A retail consumer who buys a cigarette packet for Rs 330 would not require spending exorbitantly after the recent hike in tax to buy a packet.

Notably, with the minimal increase in taxation in the current Budget, taxation has largely remained stable over the last few years and this has helped the cigarette industry to recoup volumes from illicit and contrabands.