COMMENTARY

in price be sufficient to discourage consumption of tobacco products?

Tobacco Taxation

Background
Pritam Datta, Chetana Chaudhuri

The tax hikes on smoking tobacco

in 2014 appear large in the
aggregate, but have little effect on
the price of single cigarette sticks,
a popular mode of retail in India.
Analysing the seemingly large tax
hikes on smoking tobacco, it is
argued that taxes can and must
go higher to ensure substantial
increases in single cigarette
stick prices.

Pritam Datta (pritam.datta@phfi.org) is

associated with Public Health Foundation
of India, New Delhi. Chetana Chaudhuri
(chetana.chaudhuri@gmail.com) is associated
with National Institute of Public Finance and
Policy, New Delhi.

20

moking tobacco is a global health

hazard and the situation is quite
alarming, especially in poor and
developing countries. India is home to
10% of the worlds tobacco smokers, representing the second largest group of
smokers after China (Sonaliya 2012: 243).
A report by the World Health Organization
(WHO 2011a: 22) revealed that people with
low income smoke more than those with
high income. Smoking, being an addiction,
affects household decision-making and
gender balance while spending already
scarce household resources (ADB 2012: 2).
Recent studies suggest that the most
cost-effective tobacco control strategy is
increasing the price of tobacco products by
raising tobacco tax (WHO 2013: 44). Ross,
Shariff and Gilmore (2008, 2009) argued
that choosing an excise tax that represents
at least 70% of the retail price will make a
difference with respect to lives saved as
well as taxes gained. But in 2012, only 8%
of people on the globe (530 million people
in 32 countries) were subject to tax rates
sufficiently high constituting 75% of the
retail price of cigarettes (WHO 2013: 7880). According to their estimates,1 in 2012,
excise duty accrues only 24.4% of retail
price (Rs 98) of a pack of 20 of the most
popular brand of cigarette in India. Studies
(Hu and Mao 2002: 11-14; John 2008: 19
quoted in WHO 2011b: 21) have estimated a
wide range of price elasticities for tobacco
products, indicating that demand is more
responsive to price in low- and middle-income countries than it is in high-income
countries. John (2008) estimates price
elasticity in the range of -0.87 (urban) to
-0.91 (rural) for beedis, and -0.18 (urban)
to -0.41 (rural) for cigarettes in India. In
other words, if the price goes up by 10%,
consumption will go down by 8%-9% for
beedis and 2%-4% for cigarettes in India.
The Government of India increased
tax rates in the range of 11% to 72%
across different product tiers (lengths of
cigarettes) in 2014. But how would this
increase in the tax rate translate into
prices? And would the resultant increase

A major anti-tobacco initiative Cigarette

and Other Tobacco Products Act (COPTA),
20032 was introduced in India to prohibit smoking in public places, advertisement, promotion and sponsorship of all
tobacco products, sale to minors, mandatory health warnings on tobacco products,
and regulation of contents of tobacco
products. However, tobacco taxation, it is
argued, is paramount to a successful strategy that promotes public health, reducing
tobacco consumption, while generating
government revenues (WHO 2011b: 27).
In India, most tobacco manufacturing
units (99.8%), which generate 30%3 of
the gross value added (GVA) from tobacco
products, are in the informal sector and
thereby outside the tax web and other
regulatory mechanisms. This includes
99.9% of beedi manufacturing units,
contributing 56% of GVA from beedi
manufacturing. Excises and value added
tax (VAT) are the most common forms of
taxation levied on domestic consumption of tobacco products in India, with
excise taxes constituting a greater share
of tobacco product prices.
Smoking tobacco (cigarettes, beedi,
etc) and smokeless tobacco (zarda, snuff,
etc) products are subject to specific excise duty and ad valorem excise taxes
respectively.4 Excise tax on cigarettes
and beedis are levied on a per-thousandsticks basis, and the rates are different
for different tiers in India. Lengths and
filters define tiers for cigarette manufacturing. For beedis there are only two tiers,
hand-rolled and machine-made beedis.
Beedi accounts for around 85% of total
smoking tobacco consumption in India
but excise tax duty is only Rs 12 and Rs 30
per thousand sticks of hand-rolled and
machine-made beedis, respectively. Additionally, hand-rolled beedi manufacturers who do not have any brand name,
with a production limit of 20 lakh sticks
per year, are totally tax exempted.5
Taxes and Cigarette Prices
The prices of tobacco products that
consumers face and the total tax share
in consumers price varies considerably

january 10, 2015

vol l no 2

EPW

Economic & Political Weekly

COMMENTARY

across countries and regions. The tax

share in retail prices in lower-middle income countries (45%) and in the lowincome countries (39%) are below the
global average (50%) (WHO 2011b: 30).
India is one amongst the three southeast Asian countries that have the lowest
share of tax in retail price of cigarettes.
In 2012, tax was only 43% (and excise
tax is only 26.4%) of maximum retail
price (MRP) of the most popular brand of
cigarette in India and far below than
the World Banks two-third yardstick6
(67% of price as total tax). Union Finance
Minister Arun Jaitley proposed to increase
the specific excise duty on cigarettes in
the range of 11%-72%. Excise duty has
been increased to 72% on cigarettes of
length not exceeding 65 mm and 11% on
cigarettes of length 70 to 75 mm. Likewise, the excise duty on pan masala has
been increased from 12% to 16%, of unmanufactured tobacco from 50% to
55%; and other chewing tobacco (zarda,
snuff, etc) from 60% to 70%.
Surprisingly there is no change in
excise duty on handmade and machinemade beedi manufacturing. The much
discussed 72% increase in tax is a matter
of only two tiers of cigarette, i e, unfiltered cigarette of length 60 mm to 65 mm
and filtered cigarette of length less than
65 mm. Two tiers of length 75 mm to
85 mm and more than 85 mm were
merged together in 2014 resulting in a
21% increase in tax in tiers of cigarettes
of length 75 mm to 85 mm, whereas, the
tax rate remains unchanged for the cigarettes of length more than 85 mm. Interestingly, increase in excise duty looks
quite unimpressive, if we convert it into
constant 2004-05 price (i e, adjusted to
inflation). Average (unweighted) nominal
increase in excise duty on cigarette in
2014-15 is 29% whereas; real increase of
the same in 2004-05 prices is only 19%.
The much-discussed 72% increase in
excise duty on cigarette (filtered and unfiltered) of length 60 mm to 65 mm becomes 58% if we consider inflation. There
is a decline (8%) in real excise duty on
cigarettes (filtered) of length more than
85 mm. Interestingly, other than cigarettes
(filtered and unfiltered) of length 60 mm
to 65 mm real increase in excise duty on
other tiers of cigarettes are less than 15%.
Economic & Political Weekly

EPW

january 10, 2015

Cigarettes of different length are close

substitutes. Greater increase in excise
duty in lower tier (length) as compared
to higher tier will make higher tier more
attractive to smokers as a result of reduction in the price gap between them.
So this kind of differential increase in
tax rate may lead to upward product
substitution and finally dilute the overall effect of tobacco taxation.
A closer look suggests that the nominal increase of excise duty per pack of 10
sticks is only Rs 2 to Rs 6 (i e, per stick
increase in tax is 24 to 57 paisa only).7 A
survey (Firstpost 2013) shows that 87%
of smokers buy loose cigarettes compared
to the mere 13% who buy packets. And
it is common that school- and collegegoing students often take advantage of
buying a single cigarette as a majority of
them cannot afford buying entire packs
or do not prefer to carry packets with
them. Thus, to discourage adolescent
smokers excise tax per stick should be
high enough to make even a single stick
of cigarette unaffordable.
Moreover, excise duty has become
roughly 25% to 35% of MRP of most of
the popular brands of filtered cigarette in
India. Whereas VAT8 rates9 on cigarette
differ across states from 13% in states
like Madhya Pradesh, Chandigarh, Uttarakhand to a maximum of 50% in states
like Rajasthan and Uttar Pradesh.10 But
most of the states (Jharkhand, Maharashtra, Assam, Delhi, Andhra Pradesh,

Bihar, etc) have 20% VAT on cigarettes.

Other than a few states like Rajasthan
and Uttar Pradesh, tax (excise and VAT
together) is only 45% to 55% and much
below the World Banks two-third yardstick (67% of price as total tax).
Conclusions
The proposal of increase in the specific
excise duty on cigarettes in the range of
11-72% in 2014-15 has attracted a lot of
attention. In this article, we have shown
that this alleged increment in tax rate
would not be able to make smoking tobacco a less affordable product because
of its obvious loopholes in the differential
treatment of different tobacco products
or different tiers of the same product.
First, 30% of GVA from tobacco products is generated in informal sector and
thereby outside the tax web and other
regulatory mechanism. Second, there is
no proposal of increment in tax rate in
beedi, which accounts for around 85% of
the total smoking tobacco consumption
in India. The prevailing excise tax duty
on beedi is only Rs 12 and Rs 30 per
thousand sticks of hand-rolled and
machinemade ones, respectively. Third,
excise duty is implemented mainly on
cigarettes of length not exceeding 65 mm
(72%) and of length 70 mm to 75 mm
(11%). It ignores the category where
length is greater than 85 mm, which is
a window of substitution of smaller
cigarettes by the larger ones, hence

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vol l no 2

21

COMMENTARY

encouraging greater consumption. Fourth,

with the due consideration of inflation,
the 72% figure looks quite smaller, not
more than 58%.
Finally, even after the implementation of 72% tax, nominal increase in per
pack of 10 sticks (of various lengths) is
only Rs 2 to Rs 6. For most of the states,
total tax (excise and VAT together) is
only 45% to 55% of MRP and is much
below the World Banks two-third yardstick. In reality, this increase in tax
rate, though is quite high in aggregate
terms, translates into a minuscule
increase in price of the cigarettes, and
the impact of the increase as a tool of
discouraging smoking is questionable.
Per stick increase in prices is 24 to 57 paisa
only. John (2008: 10) has shown that
even if tax on beedi is increased to
Rs 100 per thousand sticks and the tax
on an average cigarette is increased to
Rs 3.3 per stick, there would be no loss
in revenue. So there is ample scope to
increase the price of tobacco products in
India, which is also behind other countries in terms of tax rates on tobacco.
The policy initiative must increase the

tax to an extent which would ensure

significant increase in the price of the
product for each stick, both for cigarette
or beedi, so that both the width and
depth of the tax-coverage increases.
Proper implementation of evidencebased tax policies would be more effective in covering informal sectors.
Notes
1 See WHO (2013) India profile here: http://
www.who.int/tobacco/surveillance/policy/
country_profile/ind.pdf?ua=1
2 Cigarette and other Tobacco Product Act
(COPTA), 2003.
3 Estimated from ASI unit level data 2010-11.
4 A specific excise tax is a monetary value per quantity whereas; ad valorem excise tax is levied as a
percentage of the value of the tobacco products.
5 http://www.cbec.gov.in/excise/cxt2013-14/
chap24.pdf
6 In 1999, the World Bank announced a yardstick
after observing that the tax accounts for twothirds to four-fifths of the retail price of cigarettes in countries with comprehensive tobacco
control policies.
7 Real increase after union budget 2014-15 is 2 to
16 paisa per stick of cigarette.
8 Other than the central government, the Indian
states are assigned the power to levy VAT since
March 2006
9 VAT rates are from Tax Manuals of various states.
10 Himachal Pradesh government is also planning to increase VAT on cigarettes from existing 36% up to 50% (Bodh 2014).

References
ADB (2012): Tobacco Taxes: A Win-Win Measure for
Fiscal Space and Health, Asian Development
Bank, Manila.
Bodh, Anand (2014): Himachal Pradesh to Ban
Sale of Loose Cigarette, The Times of India,
10 July.
Firstpost (2013): 13 Things You May Not Know
about Indian Smokers, Firstpost, http://firstbiz.
firstpost.com/corporate/13-things-you-maynot-know-about-indian-smokers-46021.html
Hu T-W and T Mao (2002): Economics Analysis of
Tobacco and Options for Tobacco Control:
China Case Study, HNP discussion paper, Economics of tobacco control no 3, World Bank
and World Health Organization.
John, R M (2008): Price Elasticity Estimates for
Tobacco in India, Health Policy and Planning,
Vol 23, No 3, 200-09.
Ross, H Z, S Shariff and A Gilmore (2008): Economics of Tobacco Taxation in Russia, Inter
national Union against Tuberculosis and Lung
Disease, Paris.
(2009): Economics of Tobacco Taxation in
Ukraine, International Union against Tuberculosis and Lung Disease, Paris.
Sonaliya, K N (2012): The Economics of Tobacco in
India, National Journal of Medical Research,
Vol 2, No 3, 243-44.
WHO (2011a): Systematic Review of the Link
between Tobacco and Poverty, World Health
Organization.
(2011b): WHO Technical Manual on Tobacco
Tax Administration, World Health Organization.
(2013): WHO Report on the Global Tobacco
Epidemic, 2013, Enforces Ban on Tobacco Advertising, Promotion and Sponsorship, World
Health Organization.

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