Tobacco Control Issue: Original Article
Taxation of smokeless tobacco in India Rout SK, Arora M1 Health Economics, Indian Institute of Public Health (IIPH) Bhubaneswar, Public Health Foundation of India, 1Health Promotion and Tobacco Control Division, Public Health Foundation of India, New Delhi, India Correspondence to: Sarit Kumar Rout, E‑mail: [email protected]
Abstract
BACKGROUND: The role of fiscal policy, especially taxation, though has been proved to be an effective instrument of tobacco control, its application
is limited in India due to several reasons. This paper examines the tax structure, price and affordability of SLT products in order to provide evidence on how to strengthen the role of fiscal policy in tobacco control. METHOD: Secondary data on tax structure and revenue from tobacco products were collected from the Ministry of Finance, Government of India. In order to measure the rise of prices corresponding to the increase in tax rate, the retail price index (RPI) and Whole Price Index (WPI) of SLT products were compared with the price index for all commodities for the period 2006–2012. The affordability of tobacco products is calculated by dividing prices of tobacco products by per capita income. RESULTS: During the last 6 years, the tax rate on SLT has gone up leading to a rise in the prices of SLT products more than the general price rise. However, the price rise is less than the per capita income growth indicating increasing affordability. The study observed a decline in the consumption of zarda and kahini due to the price increase during 2008–2013. However, the decline in the consumption of zarda is less compared with khaini due to a very low rise in its price. CONCLUSION: The prices should be raised more than the growth in income to influence consumption. Tax administration is a major challenge for SLT products and strengthening it could enhance revenue collection from SLT products. Key Words: Affordability, consumption, tax structure
Introduction According to the Global Adult Tobacco Survey, 26% of the adults use some form of SLT. The prevalence of smoking and chewing tobacco varies across the states in India and is determined by socioeconomic and cultural practices. [1] The use of SLT, especially chewing tobacco, shows a socioeconomic gradient with higher consumption among poor, less educated and scheduled caste and scheduled tribes.[2] Further evidence indicates that though the relationship between education level and tobacco use is inconsistent, increasing income is associated with a higher likelihood of cigarette use and the lower likelihood of bidi and SLT use across the Indian states.[3] As evidence suggests, people from low socioeconomic status are more likely to use SLT and this pattern should be taken into account while designing polices for tobacco control in India. There is ample evidence showing tobacco tax is the most cost‑effective intervention of tobacco control. An increase in tax could lead to the reduction of tobacco consumption through the increase in prices of tobacco products. Several studies have produced estimates of price elasticity of tobacco products and the estimate varies across the rich and poor countries, among tobacco products and socioeconomic groups. Most of the earlier studies were related to developed countries, which produced elasticity estimates for the smoking products. However, recent studies are available for the poor and developing countries taking into account the varieties of tobacco use. The estimates from developed [4] countries suggest that the price elasticity of demand for cigarettes varies from −0.25 to −0.5 and in the low‑ and middle‑income countries this ranges between −0.5 and −0.1. In the South‑Asian countries, the short‑run price elasticity varies from −0.17 to −0.78 while the long run elasticity varies from −0.4 to −1.21. [5] Analyzing data from Access this article online Quick Response Code:
Website: www.indianjcancer.com DOI: 10.4103/0019-509X.147420 PMID:
S8
Bangladesh, one study observed own price participation elasticity of cigarette at −0.46 and −0.29 for bidi, which are also statistically significant.[6] This study also finds that own price elasticity for bidi and cigarette is higher among people from the low socioeconomic status. Using data from Sri Lanka household survey, one study suggested that tobacco prices have statistically significant effect on tobacco consumption.[7] Another study in China observed that price elasticity of demand for cigarette varied within a range of −0.50 to −0.64.[8] The consumers in low‑ and middle‑income countries are more responsive to the prices than the rich countries, evidence that may encourage the policy makers in the low‑ and middle‑income countries to use taxation effectively in their tobacco control efforts. The studies on elasticity estimation for tobacco products though are limited in India; available literature shows that a 10% increase in the price of bidi could lead to 9.2% reduction in demand in rural areas and 8.5% in urban areas.[9] For cigarettes, however, the demand is relatively inelastic to the increase in the prices. Another recent study[10] observed higher known price elasticity for cigarettes than what was previously known and observed higher price of elasticity of bidi similar to the previous study.[9] About the effect of higher taxes and prices on the tobacco consumption, it depends upon the income level, proportion of income spent on tobacco products and the socioeconomic practices. Several other studies have also examined the impact of price increase on tobacco use pattern of the adults and youths. Studies find that adults are 2–3 times more responsive to tax and prices than older persons. All these evidences make the case for higher taxation on tobacco products. Based on the case for higher tobacco taxation, this paper investigates the nature and structure of taxation of SLT products in India. The effectiveness of taxation as a tobacco control policy is examined to see whether the price rises with an increase in taxation and whether it contributes to the price increase after adjustment for inflation so that consumption is significantly reduced. The growth of revenue from SLT products during the last 12 years (2000‑2001–2012‑2013) is discussed to examine how revenue increases with an increase in tax rate. In summary, the paper examines both the public health and revenue outcomes of the taxation of SLT products in India. Indian Journal of Cancer | Dec 2014 | Volume 51 | Supplement 1
Rout and Arora: Taxation of smokeless tobacco in India
levy scheme is applicable, in which, duty is imposed on the basis of capacity of the machine installed by the manufacturer. This practice is operational from 2008. Under this scheme, a manufacturer is required to pay excise duty at rates notified by the government against slabs based on retail sale price (RSP) of the pouch based on the number of machines operating in the factory for the purpose of packing of the gutka. The duty is imposed per machine and the duty rate varies according to the RSP of the product. Though in the initial years, the revenue showed increase from gutka, the practice of manufacturing multiple chewing products with the same retail price and weight made it difficult to administer the provision. Further, the manufacturers continued producing beyond the declared capacity of the machine leading to large scale tax evasion. The scheme ran into difficulty with a notification banning use of any form of plastics to pack tobacco products under the Plastic Waste (Management and handling) Rules.
Data and Methods Secondary data on tax structure, tax rate and revenue obtained from tobacco products were collected from the Ministry of Finance, Government of India. The tax rate on SLT products was analyzed for the period during 2008‑2009–2013‑2014. In order to measure the rise of prices corresponding to the increase in tax rate, the retail price index (RPI) and Wholesale Price Index (WPI) of SLT products were compared with the price index for all commodities for the period 2006–2012. The RPI and WPI data were obtained from the Labor Bureau, Ministry of Labor, Government of India and Ministry of Commerce, respectively. In order to measure the affordability of tobacco products, the in RPI or WPI is divided with the in per capita income. The ratio obtained provides the measure of affordability, and if the ratio increases over the years, the affordability diminishes and vice versa. Further, the revenue generated from SLT products is analyzed for the period 2000‑2001–2011‑2012 compared with the increase in tax rate This study did not estimate the price elasticity of demand for SLT. However using elasticity estimation of a previous study,[9] this measured the expected decline in the consumption of SLT products due to price rise.
Central excise duty
As presented in Table 1, besides BED, Additional Excise Duty (AED) on pan masala known as Health Cess and NCCD are imposed on the SLT products. The total excise duty increases from 66% in 2008–2009 to 76% in 2013– 2014. The increase is due to rise in the BED from 50% to 60% during this period without an increase in the AED and NCCD. It rises from 34% in 2004–2005 to 60% in 2013–2014 with an increase by almost two times during the period.
Tax Structure of Smokeless Tobacco Tobacco products in India are subject to the imposition of central excise duty and the central excise duty is either specific or ad valorem. Specific excise duty is imposed, on the basis of weight, length, volume, thickness of the product. In India, smoking products such as cigarettes or bidis are taxed according to the length and tax rate varies whether a cigarette is filtered or not. Ad valorem duty, on the other hand, is imposed on the basis of the percentage of the value of the product and SLT is taxed on an ad valorem basis.
Excise Revenue from Smokeless Tobacco The excise revenue from the chewing tobacco as shown in Figure 1.1 has gone up in the last six years and the increase was pronounced from 2007 to 2008. This increased from Rs. 425 crore in 2000–2001 to Rs. 1429 crore in 2012–2013, but the rise was not consistent throughout the period. During 2000‑2001–2003‑2004, this increased, declined in 2004–2005, reached lowest in 2005–2006 and further started increasing in 2007–2008 onwards. Corresponding to increase in tax rate from 2007 to 2008, tax revenue enhanced. As a share in total revenue from tobacco products, the share of chewing tobacco was 7% during the period. The share of chewing tobacco in total tobacco revenue showed a similar trend as the growth of revenue. It increased up to 2003–2004, started declining in 2004–2005 and this decline continued up to 2006–2007 and increased afterwards [Figure 1.2]. It is evident that
The types of duties imposed by the central government are: The central government imposes basic excise duty (BED), National Calamity Contingent duty (NCCD) and health CESS on tobacco products. In addition to this, central government imposes education cess on all manufactured tobacco products. Except the central government taxes, the state governments are imposing value added taxes from 2006 before which the states did not have power to impose any tax on tobacco products. For SLT products, especially with regard to Pan Masala containing tobacco popularly known as Gutka, compounded Table 1: Tax rate on smokeless tobacco products Product categories
2008-2009 to 2009-2010
2010-2011 to 2013-2014
BED
AED
NCCD
Total
BED
AED
NCCD
Total
Chewing tobacco/preparations containing chewing tobacco (%) Snuff/preparation containing snuff (%) Tobacco extracts and essence (%) Jarda scented tobacco (%)
50 50 50 50
6 6 6 6
10 10 10 10
66 66 66 66
60 60 60 60
6 6 6 6
10 10 10 10
76 76 76 76
Others
50
6
10
66
60
6
10
76
Additional duty of excise on pan masala and other tobacco products for National Rural Health Mission know as health cess; In addition to above, an education cess @ 2% and secondary and higher education cess @ 1% on aggregate duties of excise is charged. Source: Jain RK; (various years) Central Excise Tariff of India, Centax Publication, New Delhi. BED=Basic Excise Duty; NCCD=National Calamity Contingency Duty; AED=Additional Excise Duty
Indian Journal of Cancer | Dec 2014 | Volume 51 | Supplement 1
S9
Rout and Arora: Taxation of smokeless tobacco in India
though the share increased after 2007–2008, the average share during 2000‑2001–2005‑2006 was higher than during 2006‑2007–2011‑2012. The average share was 8.05% during the former period where as this was 6.67% during the latter period. However, as share of total tax revenue, the share of chewing tobacco was very low (1 and increases over the years, the price of tobacco products rise more than the price of all commodities. As observed from Figure 1.3, the relative WPI of zarda increased from 2005–2006 to 2010–2011 and there was a slight decline in the last two years i.e. 2011–2012 and 2012–2013. In spite of the decline, this is >1 indicating the price of zarda increased more than the price of all the commodities. However, the relative WPI of chewing tobacco is
Taxation of smokeless tobacco in India Rout SK, Arora M1 Health Economics, Indian Institute of Public Health (IIPH) Bhubaneswar, Public Health Foundation of India, 1Health Promotion and Tobacco Control Division, Public Health Foundation of India, New Delhi, India Correspondence to: Sarit Kumar Rout, E‑mail: [email protected]
Abstract
BACKGROUND: The role of fiscal policy, especially taxation, though has been proved to be an effective instrument of tobacco control, its application
is limited in India due to several reasons. This paper examines the tax structure, price and affordability of SLT products in order to provide evidence on how to strengthen the role of fiscal policy in tobacco control. METHOD: Secondary data on tax structure and revenue from tobacco products were collected from the Ministry of Finance, Government of India. In order to measure the rise of prices corresponding to the increase in tax rate, the retail price index (RPI) and Whole Price Index (WPI) of SLT products were compared with the price index for all commodities for the period 2006–2012. The affordability of tobacco products is calculated by dividing prices of tobacco products by per capita income. RESULTS: During the last 6 years, the tax rate on SLT has gone up leading to a rise in the prices of SLT products more than the general price rise. However, the price rise is less than the per capita income growth indicating increasing affordability. The study observed a decline in the consumption of zarda and kahini due to the price increase during 2008–2013. However, the decline in the consumption of zarda is less compared with khaini due to a very low rise in its price. CONCLUSION: The prices should be raised more than the growth in income to influence consumption. Tax administration is a major challenge for SLT products and strengthening it could enhance revenue collection from SLT products. Key Words: Affordability, consumption, tax structure
Introduction According to the Global Adult Tobacco Survey, 26% of the adults use some form of SLT. The prevalence of smoking and chewing tobacco varies across the states in India and is determined by socioeconomic and cultural practices. [1] The use of SLT, especially chewing tobacco, shows a socioeconomic gradient with higher consumption among poor, less educated and scheduled caste and scheduled tribes.[2] Further evidence indicates that though the relationship between education level and tobacco use is inconsistent, increasing income is associated with a higher likelihood of cigarette use and the lower likelihood of bidi and SLT use across the Indian states.[3] As evidence suggests, people from low socioeconomic status are more likely to use SLT and this pattern should be taken into account while designing polices for tobacco control in India. There is ample evidence showing tobacco tax is the most cost‑effective intervention of tobacco control. An increase in tax could lead to the reduction of tobacco consumption through the increase in prices of tobacco products. Several studies have produced estimates of price elasticity of tobacco products and the estimate varies across the rich and poor countries, among tobacco products and socioeconomic groups. Most of the earlier studies were related to developed countries, which produced elasticity estimates for the smoking products. However, recent studies are available for the poor and developing countries taking into account the varieties of tobacco use. The estimates from developed [4] countries suggest that the price elasticity of demand for cigarettes varies from −0.25 to −0.5 and in the low‑ and middle‑income countries this ranges between −0.5 and −0.1. In the South‑Asian countries, the short‑run price elasticity varies from −0.17 to −0.78 while the long run elasticity varies from −0.4 to −1.21. [5] Analyzing data from Access this article online Quick Response Code:
Website: www.indianjcancer.com DOI: 10.4103/0019-509X.147420 PMID:
S8
Bangladesh, one study observed own price participation elasticity of cigarette at −0.46 and −0.29 for bidi, which are also statistically significant.[6] This study also finds that own price elasticity for bidi and cigarette is higher among people from the low socioeconomic status. Using data from Sri Lanka household survey, one study suggested that tobacco prices have statistically significant effect on tobacco consumption.[7] Another study in China observed that price elasticity of demand for cigarette varied within a range of −0.50 to −0.64.[8] The consumers in low‑ and middle‑income countries are more responsive to the prices than the rich countries, evidence that may encourage the policy makers in the low‑ and middle‑income countries to use taxation effectively in their tobacco control efforts. The studies on elasticity estimation for tobacco products though are limited in India; available literature shows that a 10% increase in the price of bidi could lead to 9.2% reduction in demand in rural areas and 8.5% in urban areas.[9] For cigarettes, however, the demand is relatively inelastic to the increase in the prices. Another recent study[10] observed higher known price elasticity for cigarettes than what was previously known and observed higher price of elasticity of bidi similar to the previous study.[9] About the effect of higher taxes and prices on the tobacco consumption, it depends upon the income level, proportion of income spent on tobacco products and the socioeconomic practices. Several other studies have also examined the impact of price increase on tobacco use pattern of the adults and youths. Studies find that adults are 2–3 times more responsive to tax and prices than older persons. All these evidences make the case for higher taxation on tobacco products. Based on the case for higher tobacco taxation, this paper investigates the nature and structure of taxation of SLT products in India. The effectiveness of taxation as a tobacco control policy is examined to see whether the price rises with an increase in taxation and whether it contributes to the price increase after adjustment for inflation so that consumption is significantly reduced. The growth of revenue from SLT products during the last 12 years (2000‑2001–2012‑2013) is discussed to examine how revenue increases with an increase in tax rate. In summary, the paper examines both the public health and revenue outcomes of the taxation of SLT products in India. Indian Journal of Cancer | Dec 2014 | Volume 51 | Supplement 1
Rout and Arora: Taxation of smokeless tobacco in India
levy scheme is applicable, in which, duty is imposed on the basis of capacity of the machine installed by the manufacturer. This practice is operational from 2008. Under this scheme, a manufacturer is required to pay excise duty at rates notified by the government against slabs based on retail sale price (RSP) of the pouch based on the number of machines operating in the factory for the purpose of packing of the gutka. The duty is imposed per machine and the duty rate varies according to the RSP of the product. Though in the initial years, the revenue showed increase from gutka, the practice of manufacturing multiple chewing products with the same retail price and weight made it difficult to administer the provision. Further, the manufacturers continued producing beyond the declared capacity of the machine leading to large scale tax evasion. The scheme ran into difficulty with a notification banning use of any form of plastics to pack tobacco products under the Plastic Waste (Management and handling) Rules.
Data and Methods Secondary data on tax structure, tax rate and revenue obtained from tobacco products were collected from the Ministry of Finance, Government of India. The tax rate on SLT products was analyzed for the period during 2008‑2009–2013‑2014. In order to measure the rise of prices corresponding to the increase in tax rate, the retail price index (RPI) and Wholesale Price Index (WPI) of SLT products were compared with the price index for all commodities for the period 2006–2012. The RPI and WPI data were obtained from the Labor Bureau, Ministry of Labor, Government of India and Ministry of Commerce, respectively. In order to measure the affordability of tobacco products, the in RPI or WPI is divided with the in per capita income. The ratio obtained provides the measure of affordability, and if the ratio increases over the years, the affordability diminishes and vice versa. Further, the revenue generated from SLT products is analyzed for the period 2000‑2001–2011‑2012 compared with the increase in tax rate This study did not estimate the price elasticity of demand for SLT. However using elasticity estimation of a previous study,[9] this measured the expected decline in the consumption of SLT products due to price rise.
Central excise duty
As presented in Table 1, besides BED, Additional Excise Duty (AED) on pan masala known as Health Cess and NCCD are imposed on the SLT products. The total excise duty increases from 66% in 2008–2009 to 76% in 2013– 2014. The increase is due to rise in the BED from 50% to 60% during this period without an increase in the AED and NCCD. It rises from 34% in 2004–2005 to 60% in 2013–2014 with an increase by almost two times during the period.
Tax Structure of Smokeless Tobacco Tobacco products in India are subject to the imposition of central excise duty and the central excise duty is either specific or ad valorem. Specific excise duty is imposed, on the basis of weight, length, volume, thickness of the product. In India, smoking products such as cigarettes or bidis are taxed according to the length and tax rate varies whether a cigarette is filtered or not. Ad valorem duty, on the other hand, is imposed on the basis of the percentage of the value of the product and SLT is taxed on an ad valorem basis.
Excise Revenue from Smokeless Tobacco The excise revenue from the chewing tobacco as shown in Figure 1.1 has gone up in the last six years and the increase was pronounced from 2007 to 2008. This increased from Rs. 425 crore in 2000–2001 to Rs. 1429 crore in 2012–2013, but the rise was not consistent throughout the period. During 2000‑2001–2003‑2004, this increased, declined in 2004–2005, reached lowest in 2005–2006 and further started increasing in 2007–2008 onwards. Corresponding to increase in tax rate from 2007 to 2008, tax revenue enhanced. As a share in total revenue from tobacco products, the share of chewing tobacco was 7% during the period. The share of chewing tobacco in total tobacco revenue showed a similar trend as the growth of revenue. It increased up to 2003–2004, started declining in 2004–2005 and this decline continued up to 2006–2007 and increased afterwards [Figure 1.2]. It is evident that
The types of duties imposed by the central government are: The central government imposes basic excise duty (BED), National Calamity Contingent duty (NCCD) and health CESS on tobacco products. In addition to this, central government imposes education cess on all manufactured tobacco products. Except the central government taxes, the state governments are imposing value added taxes from 2006 before which the states did not have power to impose any tax on tobacco products. For SLT products, especially with regard to Pan Masala containing tobacco popularly known as Gutka, compounded Table 1: Tax rate on smokeless tobacco products Product categories
2008-2009 to 2009-2010
2010-2011 to 2013-2014
BED
AED
NCCD
Total
BED
AED
NCCD
Total
Chewing tobacco/preparations containing chewing tobacco (%) Snuff/preparation containing snuff (%) Tobacco extracts and essence (%) Jarda scented tobacco (%)
50 50 50 50
6 6 6 6
10 10 10 10
66 66 66 66
60 60 60 60
6 6 6 6
10 10 10 10
76 76 76 76
Others
50
6
10
66
60
6
10
76
Additional duty of excise on pan masala and other tobacco products for National Rural Health Mission know as health cess; In addition to above, an education cess @ 2% and secondary and higher education cess @ 1% on aggregate duties of excise is charged. Source: Jain RK; (various years) Central Excise Tariff of India, Centax Publication, New Delhi. BED=Basic Excise Duty; NCCD=National Calamity Contingency Duty; AED=Additional Excise Duty
Indian Journal of Cancer | Dec 2014 | Volume 51 | Supplement 1
S9
Rout and Arora: Taxation of smokeless tobacco in India
though the share increased after 2007–2008, the average share during 2000‑2001–2005‑2006 was higher than during 2006‑2007–2011‑2012. The average share was 8.05% during the former period where as this was 6.67% during the latter period. However, as share of total tax revenue, the share of chewing tobacco was very low (1 and increases over the years, the price of tobacco products rise more than the price of all commodities. As observed from Figure 1.3, the relative WPI of zarda increased from 2005–2006 to 2010–2011 and there was a slight decline in the last two years i.e. 2011–2012 and 2012–2013. In spite of the decline, this is >1 indicating the price of zarda increased more than the price of all the commodities. However, the relative WPI of chewing tobacco is
