Introduction
The impact of GST on cigarettes is a critical factor shaping India’s tobacco industry, despite its well-documented adverse health effects, continues to thrive in India. With over 275 million tobacco users, the nation stands as the second-largest consumer of tobacco globally.
The World Health Organization (WHO) has often highlighted India’s alarming rates of mouth cancer, yet the demand for tobacco remains steady. Amid this, the role of taxation particularly GST on cigarettes and other tobacco products has become a significant factor in shaping the industry's dynamics.
In this article, we explore the impact of GST on tobacco industry, breaking down the taxes, duties, and cess imposed, while shedding light on how these measures affect consumption, revenue, and public health.
The Impact of GST on cigarettes (Tobacco Industry)
Tobacco is classified as a sin good, which means it is heavily taxed to discourage consumption while generating substantial revenue for the government. Despite the steep taxes, the WHO recommends a minimum tax burden of 75% on all tobacco products, a benchmark India has yet to fully achieve.
Multiple Tax Components
The Indian tobacco industry faces a cumulative tax burden from various sources, including:
- Central Excise Duty
- National Calamity Contingent Duty (NCCD)
- GST
- Compensation Cess
These taxes collectively contribute to the high retail price of tobacco products. However, experts argue that the tax rates, though high, remain insufficient to significantly curb consumption, particularly in rural areas where affordability persists.
Recent Developments in Tobacco Taxation in India
The government has consistently increased taxes on tobacco products. A notable move in Budget 2023 was the upward revision of the NCCD rate by 16%, a step aimed at raising prices and reducing consumption. Additionally, discussions in the upcoming 55th GST Council Meeting suggest the possibility of increasing the Rate of GST on cigarettes from 28% to 35%.
Such measures reflect the dual objective of tobacco taxation:
- Curbing consumption by making tobacco products less affordable.
- Boosting revenue to fund healthcare and other public welfare initiatives.
GST Rate on Tobacco Products
The current rate of GST on cigarettes and tobacco products is among the highest, at 28%, covering items like:
- Cigarettes
- Pan masala
- Cigarillos
- Hookah tobacco
In addition to GST, a compensation cess and excise duty are also levied, significantly increasing the overall tax burden.
Duties and Cess on Tobacco Products
To better understand the taxation structure, let’s examine the different taxes applied to cigarettes
Below is the Cigarette tax calculation:
Taxation Structure for Cigarettes
| Particulars | Excise Duty (per 1,000 sticks) | NCCD (per 1,000 sticks) | Compensation Cess |
| Cigarettes (up to 65mm) | ₹5 | ₹230 | 5% + ₹2,076 |
| Cigarettes (65-70mm) | ₹5 | ₹290 | 5% + ₹3,668 |
| Filter cigarettes (up to 65mm) | ₹5 | ₹510 | 5% + ₹2,076 |
| Filter cigarettes (65-70mm) | ₹5 | ₹510 | 5% + ₹2,747 |
| Other cigarettes containing tobacco | ₹10 | ₹850 | 36% + ₹4,170 |
Calculation of GST on Cigarettes
Let’s take a practical example to understand the pricing breakdown of a pack of 10 non-filter cigarettes (up to 65mm):
| Particulars | Amount (₹) |
| Cost of manufacturing | 100 |
| Excise Duty (0.5% on abated value) | 0.23 |
| NCCD (₹230 per 1,000 sticks) | 1.04 |
| GST (28%) | 28.35 |
| Compensation Cess (5% + ₹2,076) | 25.82 |
| Total Sale Price | ₹155.44 |
This example demonstrates how taxes account for a significant portion of the retail price, although their impact on affordability remains debatable.
Challenges in Curbing Tobacco Consumption and Public Health
Despite high taxes, tobacco products remain relatively affordable in India. Factors contributing to this include:
Price Sensitivity
Many rural consumers opt for cheaper alternatives like bidis and chewing tobacco, which face a lower tax burden.
Lack of Enforcement
Illicit trade and tax evasion undermine efforts to regulate prices and consumption.
Limited Awareness
Public health campaigns often fail to reach vulnerable populations effectively.
Benefits of Increasing Taxes on Tobacco
Increasing taxes on tobacco products has far-reaching benefits:
Public Health
Higher prices deter consumption, particularly among youth and low-income groups.
Revenue Generation
Additional funds can be allocated to healthcare and anti-tobacco campaigns.
Social Impact
Reduced consumption leads to fewer tobacco-related illnesses, alleviating the burden on healthcare systems.
Proposed Hike in GST: What to Expect
The government’s proposal to increase the GST rate to 35% for over 148 items, including tobacco, is a significant step toward meeting the WHO’s recommendations. If implemented, this hike could:
- Make tobacco products less affordable.
- Increase revenue for health initiatives.
- Strengthen India’s commitment to global anti-tobacco goals.
For More information please refer to:
- The Economics of Sin Goods: How Taxes Influence Consumption (NBER)
- Breaking Down India's GST Structure: A Focus on High-Tax Products (Bajaj Finserve)
- Public Health vs. Revenue: The Dual Role of Tobacco Taxation (CBPP)
- Curbing Tobacco Consumption in Rural India: Challenges and Solutions (National Library of Medicine)
Conclusion
The tobacco industry occupies a unique position in India’s economy, balancing substantial revenue generation against the health risks it poses. While GST and other taxes have made cigarettes and tobacco products more expensive, they remain accessible to a large segment of the population.
A more aggressive taxation policy, coupled with stringent enforcement and robust public awareness campaigns, is essential to achieve the dual objectives of curbing tobacco consumption and boosting government revenue.
FAQs
1. What is the current GST rate on tobacco products?
The GST rate on tobacco products, including cigarettes, is 28%, along with a compensation cess and excise duty.
2. How does GST impact tobacco pricing?
GST, combined with other duties and cess, significantly increases the retail price of tobacco products, though affordability remains an issue for certain consumer segments.
3. What changes are proposed in the 55th GST Council Meeting?
A hike in the GST rate from 28% to 35% for tobacco and other items is under consideration to reduce consumption and increase revenue.
4. Why is tobacco considered a sin good?
Tobacco is categorized as a sin good due to its adverse health effects and the societal costs associated with its consumption.5. How does India’s tobacco taxation compare globally?
India’s tax burden on tobacco products falls short of the WHO’s recommended 75% minimum, indicating room for policy enhancements.
