On the global tax day, the eighth anniversary of GST in India, tax policy response to tobacco has represented the good, the bad and the ugly in achieving the right balance between achieving public health objectives and recognising the economic contributions of an industry and the unintended adverse consequences of excessive tax burden.
The GST Framework for Tobacco
GST replaced a number of indirect taxes, leading to transparency and compliances. For tobacco products, the system is a GST plus a separate compensation cess, which was levied to neutralise state revenue lost on the introduction of the tax, and is scheduled to expire in 2026.
Economic Significance of Tobacco
The economy is dominated by the tobacco industry. India is the world’s second largest producer, and over 45 million livelihoods rely on it. The industry provides tax revenue of more than ₹ 72,000 crore annually and some ₹ 12,000 crore as foreign exchange earnings through exports.
The Unintended Consequence: Growing Illicit Trade
The high tax that leads India to have one of the most expensive cigarette markets in the world also comes up with a huge negative. It has made legal products less affordable and helped to drive a market in illicit ones.
- Illegal cigarettes that avoid taxes and are sold without health warnings accounted for over 25 percent of the market in 2023.
- This illicit trade is believed to be around ₹600 crore per year, fuels criminal activities and has led to considerable job losses — pegged at 3.7 lakh in 2019-20.
Tax Structure and Policy Recommendations
Former wisdom that GST would lean towards quid-pro-quo or ‘specific’ (quantity based) taxes has now only yielded to a strong ‘ad valorem’ (value based) one. A hybrid system combining predominantly specific taxation (as in two of the countries leading the global best practice league - the UK and Sweden and to prevent tax avoidance and to provide for... Such an approach can discourage the illicit trade and also serve broader public health goals.
The Road Ahead
The future of the compensation cess is under scrutiny as its sunset is due in 2026. Any future policy should be seeking to present a stable tax system which finds the right balance between tax take, public health goal, and the sustainability of millions of jobs, without increasing the tax burden on society at large. Further it is vital to strengthen weapons and enforcement laws to combat illicit trade.
Month: Current Affairs - August 22, 2025
Category: current affairs daily