Levy a higher GST rate on tobacco, sugared beverages

‘While much of the public discourse has focused on tobacco, the proposed GST hike on sugar-sweetened beverages is equally significant’
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Over the past seven years, since the introduction of the Goods and Services Tax (GST), there have been no significant increases in GST rates on harmful products such as tobacco and sugar-sweetened beverages, except for two minor hikes in National Calamity Contingent Duties (NCCD) on tobacco. This has made these products more affordable, undermining efforts to curb their consumption. In this context, the proposal by the Group of Ministers (GoM) to raise the highest GST tier on tobacco and sugar-sweetened beverages from 28% to 35% is a welcome step. However, further tax reforms are essential to effectively tackle the public health and fiscal challenges associated with these products.

Impact of proposed GST rate hike

India is the second-largest consumer of tobacco globally, with 28.6% of adults above 15 years and 8.5% of students aged 13 to 15 years using tobacco in some form. Tobacco is a leading risk factor for non-communicable diseases (NCDs) and causes over 3,500 daily deaths in India. In 2017, the annual economic burden of tobacco use and second-hand smoke was estimated at ₹2,340 billion, or 1.4% of GDP — far exceeding the ₹538 billion collected annually in tobacco tax revenue.

The proposed GST hike to 35% is expected to reduce tobacco consumption and boost tax revenues. Preliminary estimates suggest the 35% rate would lead to a 5.5% price increase, a 5% drop in consumption, and an 18.6% revenue rise for beedis. For cigarettes, prices would increase by 3.9%, consumption decline by 1.3%, and revenue grow by 6.4%. Smokeless tobacco prices would rise by 3%, consumption drop by 2.7%, and revenue increase by 1.9%. Overall, this could generate an additional ₹43 billion annually, provided the industry does not “over-shift” the tax burden, which can result in excess profits at the expense of government revenue and public health.

The GoM’s recommendation to raise GST rates to 35% is a positive step but falls short of the 40% peak rate allowed under GST law. A 40% rate would have a greater impact, leading to sharper price increases, larger consumption reductions, and an additional ₹72 billion in revenue. It would also lower the risk of the industry over-shifting the tax burden. Currently, the tax burden on tobacco products is uneven, with taxes accounting for only 22% of the retail price of beedis, while it accounts for 49.5% for cigarettes and 64% for smokeless tobacco. The 35% GST rate would narrow this gap slightly, raising their respective tax shares to 26%, 51%, and 65%, but a 40% rate could reduce this disparity further. The World Health Organization Framework Convention on Tobacco Control (WHO FCTC), to which India is a signatory, recommends that all tobacco products be taxed comparably to prevent substitution between them.

Concerns from the tobacco industry about increased illicit trade due to higher taxes are unfounded. Evidence, including from India, shows that tax hikes have minimal impact on illicit trade. Instead, factors such as tax administration quality, regulatory frameworks, government commitment, governance strength, social acceptance, and informal distribution networks play a far more significant role in determining the scale of illicit markets.

Balancing GST and excise taxes

Another key issue is the reliance on GST, a purely ad valorem tax, to regulate tobacco consumption. Ad valorem taxes are less effective than specific excise taxes in curbing tobacco use as they are tied to product prices, which the industry can manipulate. Since the introduction of GST, the share of excise taxes in total tobacco taxation has declined, reducing the tax system’s effectiveness in discouraging tobacco use. Many countries with GST or value-added tax (VAT) supplement these with specific excise duties on harmful products such as tobacco. India should consider raising excise taxes alongside the GST revision for a stronger and more comprehensive taxation framework.

While much of the public discourse has focused on tobacco, the proposed GST hike on sugar-sweetened beverages is equally significant. Excessive consumption of sugar-sweetened beverages is a major contributor to obesity, diabetes, and other NCDs. Increasing the GST rate to 35% could discourage consumption and align with India’s broader public health goals. However, the government should also consider introducing additional health-focused levies, such as a specific excise tax on sugar-sweetened beverages, to further strengthen the tax framework.

Key considerations for GST Council

As the GST Council considers the GoM’s recommendations, it should use this opportunity to reform the taxation of harmful products. Raising GST rates to 40% for tobacco and sugar-sweetened beverages would enhance public health benefits while aligning with the peak rate under GST law. Pairing this with higher excise taxes would create a mixed tax structure, proven more effective at reducing consumption than relying predominantly on ad valorem taxes. Reducing the discrepancy in tax burden between beedis, cigarettes, and smokeless tobacco is also crucial to discourage substitution and follow global best practices. These steps could significantly reduce the health and economic impacts of tobacco and sugar-sweetened beverages while generating vital revenue for development.

Rijo M. John is a health economist and professor at the Rajagiri College of Social Sciences, Kochi, Kerala