Tobacco products may attract higher taxes in Budget

The health ministry has proposed a tax hike of Rs 3.5 per stick on cigarettes

Tobacco products are likely to attract higher taxes and stricter regulation in the coming Budget for 2014-15. The health ministry has proposed a substantial tax hike of Rs 3.5 per stick on cigarettes of all sizes and removal of tax exemption given to several bidi manufacturers.

“Specifically, I propose to reform tobacco taxes in the 2014 Budget of the new government and implement a large but feasible tax hike in the 2014 Budget on cigarettes to Rs 3.5 per stick. The tax would be applied to all lengths to prevent the industry (from) shifting production and marketing of lower length cigarettes, as has been the past practice,” Health Minister Harsh Vardhan recently wrote to finance minister Arun Jaitley.

The previous United Progressive Alliance (UPA) government had raised taxes on cigarettes by 19 per cent in the February 2013 Budget. Vardhan noted this was “too small” to meaningfully reduce consumption and was focused on the longer-length cigarettes. This had encouraged manufactures to increase production of low-length cigarettes.

A latest report by the Public Health Foundation of India on the economic burden due to tobacco-related diseases highlighted how tobacco use and the associated costs put an enormous economic burden on the nation. It showed during 2011, the total economic cost from all diseases attributable to tobacco use was estimated at a staggering Rs 1,04,500 crore. This is 1.16 per cent of the gross domestic product and 12 per cent more than the combined state and Central government expenditure on health care during the year. The total central excise revenue from all tobacco products combined in the same year was estimated at 17 per cent of the total economic cost of tobacco.

Vardhan emphasised higher cigarette tax will not only yield public health, but also fiscal benefits. He assured higher taxes would not lead to significant substitution from cigarettes to bidis. “Raising the proportion of specific tax on cigarettes as a percentage of their retail price from about 45 per cent to over 60 per cent of the retail price of cigarettes would conservatively lead to about three million smokers quitting and nearly three million children not starting,” the letter stated. It added the increase in tax would raise at least Rs 3,800 crore more from cigarette revenue.

In his letter to Jaitley, Vardhan also stressed on the urgent need for regulating the bidi industry. Apart from removal of tax exemption extended to bidi makers producing less than two million bidis, he also suggested redefining taxation points in the bidi tax policy to ensure collection of revenue and prevent tax evasion in the long run.

The ministry also indicated it will submit separate proposals on actions required at the state level such as additional value-added tax on tobacco products and creating greater awareness against smoking, etc.

Separately, the health minister has also written to chief ministers asking them to identify two or three locations for setting up All India Institute of Medical Sciences to treat the rising number of critical care patients.