A ‘smoke’screen? Higher GST on tobacco can improve societal health

Interestingly, this common-sense approach is exactly what the Group of Ministers (GoM), set up by the GST Council, has proposed for the country’s tax structure. It has recommended a major revision of taxes, aligning them more closely with the critical and essential priorities of the common person. Essential items like bottled water, bicycles, and exercise books will see reduced levies. Simultaneously, there is momentum to reduce the GST on health and life insurance premiums, making these essential services more affordable. High-value luxury goods, including tobacco products, will face higher GST rates.

Just as a family prioritises investments for the well-being of its members, this proposal reflects a national vision for a healthier, more equitable India.

Using tobacco products like cigarettes, bidis and gutka kills about half of the people who use them and takes 11 years off a life on average. In India, tobacco kills nearly 1.3 million people each year and makes millions more sick. These numbers are not just statistics; they represent families torn apart and enormous societal costs in terms of lost productivity and healthcare burdens.

However, there is a proven way to reduce this needless death and disease — taxation. Raising taxes on tobacco products to increase their prices is the single most effective policy to reduce consumption. Higher prices discourage people from starting, encourage current users to quit, and prevent relapse among former users. This is particularly true for young people, who are highly price-sensitive. Many smokers would quit, many young people would never start, and hundreds of thousands of lives could be saved even in the short term.

To add another big win, because consumption declines disproportionately less compared to the tax increase, these tax increases will lead to substantially higher tax revenues, which can be used to support health, education, and other policies that promote societal well-being. And because lower-income people are more responsive to price, they are more likely to quit or consume less, and the benefits will go more to them. In other words, taxing tobacco products is a highly progressive policy.

In this context, the proposal to place tobacco products in a higher slab of the GST at 35 per cent is an excellent policy for both public and fiscal health. It will also help to correct a somewhat rocky recent path for tobacco tax policies in India that began well when the GST was introduced.

The Economics for Health programme at Johns Hopkins University Bloomberg School of Public Health evaluates countries’ tobacco tax policies biennially on a scale of 0 to 5, with 5 being the top score. It evaluates the overall price, the tax share of price, the change in affordability, and the tax structure. India’s overall score in the latest edition was 1.5 out of 5, which was below the global average of 1.99. India’s tax share of prices of all the major tobacco products falls significantly short of the WHO’s recommended minimum of 75 per cent.

India continues to struggle on both tax structure and change in affordability. Like many of its South Asian neighbours, India maintains a tiered structure wherein excise taxes are lower on some brands. This means that when taxes and prices increase, there remain cheaper, similar products to which users can switch. Furthermore, bidis have much lower or even no tax and are therefore very inexpensive. Because of both the problematic tax structure and the lack of regular, significant tax increases, from 2016 to 2022, tobacco products like cigarettes, bidis and chewing tobacco products have become more affordable on average.

For India to maximise the health and fiscal potential of tobacco taxes, it is necessary to improve on several things. In brief, India needs a unified tax structure — the same rate applied per cigarette no matter the brand, price, or other characteristic — that relies more on specific excise taxes and is adjusted upward annually more than the combination of inflation and income growth. The government must also consider how to regulate and tax bidis, the other major smoked tobacco product, more effectively, and eventually smokeless products, too.

Just as every family must balance its books wisely, so too must a nation. India is on the right track with the proposed increase in the GST for tobacco products. The GST Council’s deliberations on restructuring the tax system come as a timely opportunity to address these gaps.

While these proposals are commendable, they require strong political will to overcome opposition from the powerful tobacco industry. This industry, with its vast resources, will undoubtedly resist any move that threatens its profits. However, the stakes are too high for hesitation. The GST Council has an opportunity to demonstrate courage and foresight by adopting these reforms.

A higher GST slab for tobacco products will not only save lives but also align with India’s broader goals of creating a healthier, more productive population. The revenue generated can be reinvested in public goods, reinforcing the nation’s commitment to universal health and social equity.

Jeffrey Drope is Director of Economics for Health (formerly Tobacconomics), as well as a Research Professor at the Johns Hopkins Bloomberg School of Public Health. Mukesh Kejriwal is a Delhi-based journalist works on health and tobacco control issues