Since GST’s introduction, there have been minimal rate hikes on harmful products like tobacco and sugar-sweetened beverages, making them more affordable. The GoM’s proposal to raise GST from 28% to 35% is a positive step towards curbing consumption.

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Potential Impact of Proposed GST Rate Hike

The proposed GST hike to 35% is expected to:

• Tobacco Consumption Impact: 
  • Beedis: A 5.5% increase in price is projected to reduce consumption by 5% while increasing revenue by 18.6%.
  • Cigarettes: Prices would rise by 3.9%, leading to a 1.3% decline in consumption and a 6.4% revenue boost.
  • Smokeless Tobacco: A 3% price increase could decrease consumption by 2.7% and raise revenue by 1.9%.
  • These changes, if implemented, could collectively generate an additional ₹43 billion annually. 
• Sugar-sweetened beverages: These are a major contributor to obesity, diabetes, and other non-communicable diseases (NCDs). India’s rising burden of NCDs has significant implications for healthcare costs and workforce productivity.
• Potential Benefits of GST Rate Increase
  • Discourage excessive consumption, particularly among younger populations.
  • Align with India’s broader public health objectives by addressing the root causes of diet-related illnesses.
  • Reinforce global trends in using fiscal policies to combat obesity and diabetes.

Need for a Higher Tax Rate

• 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 could also reduce the disparity in taxes across tobacco products and bring the tax structure closer to a more equitable distribution. Otherwise, people may shift to products with lower taxes.
• 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.

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Associated Concerns

Potential for Increased Smuggling and Black Market Activity: The tobacco industry expresses concerns about increased illicit trade due to higher taxes.

• However, evidence, including from India, shows that tax hikes have minimal impact on illicit trade. 
• 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.

Way Forward

1. Adopt a Mixed Tax Structure

• Pair ad valorem GST rates with specific excise taxes for better effectiveness in reducing consumption.
  • Ad valorem taxes are tied to product prices and can be manipulated by the industry. Specific excise duties, which are based on quantity, offer a more stable and impactful means to discourage usage.
  • Raising excise taxes alongside GST rates would create a balanced taxation model, aligning with global best practices.

2. Increase GST Rates to 40%

• The GST Council should consider increasing the rates for tobacco and sugar-sweetened beverages to the peak 40% rate allowed under GST law.
  • This would lead to sharper price increases, reduce consumption significantly, and generate higher revenue.

3. Implement Targeted Excise Taxes for Sugar-Sweetened Beverages

• Introduce a specific excise tax on sugar-sweetened beverages in addition to the GST hike.
  • This would strengthen the health focus by directly targeting products linked to obesity, diabetes, and other non-communicable diseases (NCDs).
  • It would also complement India’s broader public health goals.

5. Focus on Revenue Utilization for Public Health

• Direct a portion of the additional revenue from higher taxes toward funding public health initiatives.
  • Invest in programs for NCD prevention, health education, and treatment infrastructure.
  • This would amplify the long-term benefits of the tax reforms by addressing health impacts comprehensively.

6. Periodic Tax Reviews and Adjustments

• Establish a mechanism for regular reviews of GST and excise taxes on harmful products.
  • Ensure that taxation keeps pace with inflation and changing consumption patterns.
  • Guard against the industry’s ability to manipulate product prices or shift the tax burden.

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Conclusion

Steps like raising the GST on tobacco and sugar-sweetened beverages is a positive move to curb consumption and improve public health. However, supplementing this with specific excise taxes would enhance effectiveness, reduce disparities, and generate greater revenue.

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