Critical understanding of the Indian budget 2014-15: The Case of Excise on Cigarettes
Does a tax on cigarettes serve
any purpose? For a layman seeing the budget figures of a very high excise rate
on cigarettes would mean that it indeed makes the stick costlier and would lead
to a reduction in its usage. However, there are some crucial figures on smoking
and the usage of tobacco which could paint a picture more nuanced than a
layman’s observation. This picture also allows us to critically understand
policy measures of the federal government. Here the federal budget 2014-15
provides us with this platform.
Does an excise increase matter? Costs, benefits and the illegal.
An excise taxes on the stick is
likely to have little or no implications in terms of revenue generation (at
least to sponsor health expenditure or to provide a source for funding
big-budget expenditure) save for the cost burden passed on to the consumers of
cigarettes. If that discourages them from smoking then well and good. The
reason is simple and has often been cited. The Public Health Foundation of
India estimated the economic cost of smoking at several lakh crores of Rupees
and the direct cost to be approximately Rupees 16,000 crore. The expected tax
gains of approximately Rupees 4,000 crore, from the excise hike, is nothing
compared to the budget expenditure of approximately Rupees 18 lakh crores nor sufficient
to cover the direct economic cost of smoking. The huge unregistered market for
tobacco and intoxicants would just feel relieved following these hikes since it
is more likely that people (not all, but at least a few) would shift to these
substitutes. The above tax affects the registered legal part of the industry.
But what about the unregistered sector and of course the no-smoke versions of
tobacco? Unregistered cultivation of tobacco is prevalent in India. Tobacco
Atlas by the World Lung Foundation in 2012 showed that out of the 35 per cent
(approximately 275 million) adult population in India who uses tobacco a large
number of users (164 million) use smokeless tobacco. Beedi and smokeless tobacco
constitute 81 per cent of the total consumption. And of course there is a huge
risk factor in consuming tobacco. The expected deaths by the year 2030 is 8
million. [1]
But strictly speaking majority of this consumption falls outside the new excise
structure.
How could the state be responsible?
To make the federal state accountable
and responsible for these taxes it should be accompanied by a suitable reform
to implement a well-defined objective (say for instance to promote health). The
question is how much of these taxes reduce consumption and encourage a
healthier life. For one thing, such a reason (to promote health) by increasing
the tax rates is highly debatable. The argument is that any excise duty change
is likely to influence only the dominant industries in the market; majority of
the consumers would resort to other options and the federal and state
governments does not yet have a catastrophic situation facing them due to
smoking. This would then go on to suggest that the state should not remain a
passive observer after the tariff hike; rather it should actively get involved
in drafting and implementing a policy and a regulatory apparatus on handling
the large illegal market for tobacco in India. Now the market response to this hike in the
budget and post-budget sessions were different. Major tobacco producer Indian
Tobacco Company (ITC) found that the hike helped them compete much with the
other industry players.[2]
The Cigarette industry in India is an oligopoly dominated by ITC, Godfrey
Phillips India (GPI) and Vazir Sultan Tobacco Company (VST). VST in which
production is dominated by micro filters is likely to be most influenced most
by these taxes. Foreign firms have a significant presence in these industries
and their responses would depend on their shares. Continuous price rise
following excise hikes in each budgets and additional Value Added Tax (VAT) by
the federal states have promised a bleak picture for the industry. But not for
the people, nor for the state. But yet nobody is interested in banning
cigarettes; the reason might be that the externalities of smoke affect only
people within a specific radius. Very few people would get irritated or
concerned seeing a person smoke half a mile away (until of course you are
allergic to the sight of smoke); and very few cares whether that person would
die of smoking. And some others would say that this is much better than the
soot filled smokes from our public transport vehicles. But a tax on smoking is
likely to tickle one of our nerves awake and make us think and respond like a
good citizen. A non-smoker would feel proud of the fact that the federal state
is aware and concerned of our health; and it would be much appreciable that a
health expenditure etc. of the citizens are kept in check. But here again no
one knows for sure how much of the total budgeted expenditure on health goes to
help the smokers and victims of passive smoking.
If a tax should matter
If for one thing the excise has
to matter it should makes the role of the state more prominent in producing the
intended results. However, as mentioned these intentions are not clear. India
has a policy of promoting exports of tobacco and we are the third largest
producers of leaf tobacco in the world. There is substantial institutional
infrastructure on research and development for tobacco. On the other hand this
is also a product whose cultivation is influenced by the availability of a
large amount of pesticides and child labour. So reducing consumption of tobacco
should be preceded by certain institutional reforms and changes. But we don’t
see any hurry in any of these requirements. India has already banned smoking in
public places. The federal and state governments implemented the Cigarettes and
Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade
and Commerce, Production, Supply and Distribution) Act, 2003 (COTPA) to control
smoking in public. However, the policy
has not been efficiently implemented since a complete monitoring would involve
tracking each and every smoker constantly. There are obvious challenges if
reduction in consumption is an intended result. If the state aims to reduce
consumption it would mean that the existing regulatory apparatus should strive
hard to bring the approximately 81 per cent of the looming unregistered market
(of beedi or smokeless tobacco) within legal limits. This is a daunting task considering the fact
that smoke (or no smoke tobacco) need not come from the organized industrial
units alone. On the other hand, the incentives for the state on a complete ban
of cigarettes is negligible.
A Critical Reminder on the Budget
The case of tobacco has
significant lessons for the manner in which a budget document is often read or
misread. Budgets as a policy statement has more life to it than merely being an
accounting fact to understand the difficulty at the implementation level.
Annual budgets for most laymen are interesting for the different numbers that
they toss in front of us. Some appears interesting; but very few are understood
in depth to reveal their underlying implications. But each of these figures are
dynamic and has spread effects which goes in various depths with the various
linkages that it has in the economy. For cigarettes at least, we see that the
story runs deep; imagine what the case would be for the myriad commodities
which have been included in the list. So does not the budget make a difference?
It is worth thinking about.
Rahul V Kumar
[1] http://timesofindia.indiatimes.com/india/World-Tobacco-Atlas-rings-alarm-bells-for-India/articleshow/12448418.cms
[2]
The increase in share value of ITC need not be restricted to its response to
excise on cigarettes alone. ITC offers a range of products and the market value
of ITC shares could also have been significantly influenced by how these
products were dealt with in the budget.
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