India’s bold step: taxing tobacco to protect the health of the poor

Tobacco kills nearly one million people in India every year. It disproportionately affects the poor who are pushed into an endless cycle of poverty because of the ill health effects of tobacco. There is scientific evidence that raising taxes on tobacco products is the most effective means to reduce tobacco use and encourage tobacco users to quit. Higher taxes are especially effective at reducing tobacco use among the poor and preventing youth from starting.

This year India took a bold step by increasing the excise duty on cigarettes, cigars, cheroots and cigarillos in the range of 11% to 72%. The excise duty has also been increased from 12% to 16% on pan masala, from 50% to 55% on unmanufactured tobacco, and from 60% to 70% on Zarda, scented tobacco, gutka and chewing tobacco. These heavy duties are health-conscious policies that will help improve the well-being of Indians, especially youth and women, who are increasingly targeted by tobacco marketing.

Additionally, the excise duty structure has been simplified. Currently, India has a tiered taxation system for cigarettes, where taxation differs based on the length of the cigarette. Harmonizing the system, or taxing all tobacco products the same, will lead to a more effective system with less opportunity for tax evasion. With this year’s budget, India took a step in the right direction by merging two tiers, to simplify the tax structure. Finally, India has reduced the duty-free allowance of cigarettes from 200 to 100. These steps are commendable.

WHO estimates that with these policy changes, cigarette consumption will be reduced by 5%, with the greatest change among middle and low-income smokers. Retail prices will increase by anywhere between 17% to 31% for the cheapest filter and non-filter cigarettes. This will bring in over Rs 3000 crore to the exchequer. These are all welcome steps to protect Indians from the myriad health complications—such as lung disease, cardiovascular disease and cancers of all types—caused by tobacco use.

While these tax increases overall are a huge step forward in the battle against tobacco, there are unexpected consequences that may hinder India’s efforts. This year’s budget did not raise taxes on bidis, consumed largely by the poor. Already, over 73 million people, 16% of the adult population in India, are bidi smokers. As the price of other tobacco products increases, lower-income populations will increasingly be driven to using cheaper tobacco like bidis.

Not only are bidis harmful to those who smoke them, but also to the workers who roll them. More than 90% of the bidis are hand rolled, involving mainly women and children. Studies indicate that bidi rolling households live in a state of absolute poverty trapped in debt, under unhealthy working conditions exposed to health hazards of tobacco dust, and long hours of sitting resulting in exacerbation of tuberculosis, asthma, anemia, giddiness, postural and eye problems, and gynecological problems.

India now needs to take yet another bold step and focus on tobacco products, such as bidis, which are easily affordable to the poor and currently not as heavily taxed. Consumption of bidis is 10 times that of cigarettes in India. And yet, the revenue generated from taxing bidis is insignificant with bidis accounting for less than 3% of the total central excise revenue from tobacco products in 2013-14.. The excise duty on bidis is very low (Rs 16 on hand-made and Rs. 28 on machine-made per 1000 sticks in 2013).

States like Rajasthan have taken significant steps to tax all tobacco products including bidis at 65% (value added tax). This has resulted in a concomitant increase in bidi prices in the state. In recognition of this initiative, WHO has conferred the World No tobacco Day 2014 Award to the Government of Rajasthan.

As per economic studies, a 10% increase in bidi prices could reduce rural bidi consumption by 9.2%. Raising bidi taxes to Rs 98 per 1000 sticks would add Rs 36.9 billion to tax revenues and prevent 15.5 million current and future smokers dying prematurely.

The total economic cost attributable to tobacco use from all diseases in India in 2011 amounted to Rs 1,04,500 crores (USD 22.4 billion). This is 12% more than the combined central and state government expenditures on health in 2011-12. Yet, the total central excise revenue gains from all tobacco products in 2011-2012 was only at 17% of the estimated economic costs of tobacco. India’s cigarette taxes and prices are low compared to other middle-income countries. There is thus wide scope for increasing taxes on tobacco further.

WHO encourages countries to strengthen their tax administration to increase their revenues, and in the process, protects people’s health.

To protect the poor from the devastating health and economic impacts of tobacco use, it is important to ensure that taxes on all tobacco products, including bidis, are simplified, harmonized, and raised periodically as per capita income increases.