Answer 

The introduction of higher GST rates on tobacco products and sugar-sweetened beverages (SSBs) aims to reduce consumption and mitigate related public health risks, such as cancer and obesity. While taxes have shown some success in curbing demand for these harmful products, their effectiveness in significantly addressing public health issues depends on factors like consumer behavior, enforcement, and availability of substitutes.

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Positive Impacts of Higher GST Rates on Consumption Patterns

• Reduced Consumption of Harmful Products: Higher GST rates lead to higher prices, which can discourage consumption of tobacco and sugary beverages.
• Increased Tax Revenue: The hike in GST can generate additional revenue that can be directed toward public health programs and awareness campaigns.
  For example: The proposed GST hike could generate ₹43 billion in additional revenue.
• Aligning with Global Standards: Raising GST rates brings India closer to global practices, such as those recommended by the WHO Framework Convention on Tobacco Control (FCTC).
  For example: WHO recommends similar tax structures across all tobacco products to prevent substitution.
• Deterrent for New Users: Higher taxes can act as a deterrent, especially for first-time users, as the financial barrier becomes significant enough to discourage experimentation or adoption.
• Industry Push for Healthier Products: Higher GST rates on SSBs may pressure manufacturers to innovate and introduce healthier products, such as low-sugar or sugar-free alternatives, to maintain market share.

Limitations of Higher GST Rates on Consumption Patterns

• Manipulation of Tax Burden: Tobacco and beverage industries may pass the tax burden to consumers or engage in price manipulation, undermining the effectiveness of the tax hike.
  For example: In the past, tobacco industries have raised prices more than the actual tax increase, benefiting from higher profit margins.
• Substitution Between Products: Consumers might switch from one harmful product to another, mitigating the intended reduction in consumption.
  For example: Higher taxes on cigarettes may increase the consumption of beedis, a cheaper alternative.
• Limited Impact on Affluent Consumers: Higher prices might have less effect on wealthier individuals, who are less price-sensitive and continue purchasing tobacco and sugary beverages.
  For example: In urban areas, the wealthier population might not reduce their consumption despite price hikes.
• Black Market and Illicit Trade: Higher taxes could fuel the growth of illicit markets and smuggling, reducing the revenue benefits and public health impact.
  For example: Despite tax hikes, India continues to face challenges with illicit tobacco products.

Taxation can be effective in addressing related public health issues

• Generates equitable tax burden: Raising GST to 40% narrows disparities among tobacco forms, discouraging substitution between beedis and cigarettes.
  For example: WHO advocates equal taxation to deter cheaper substitutes like smokeless tobacco.
• Reduces non-communicable diseases (NCDs): Higher taxes reduce exposure to risk factors for NCDs, directly lowering healthcare burdens and improving population health.
  For example: Mexico’s sugary drink tax cut diabetes prevalence by 4% in 5 years.
• Generates revenue for health programs: Tax revenue from harmful products can be allocated to public health campaigns and treatment programs.
  For example: India’s tobacco tax revenue funded anti-smoking awareness drives.
• Minimizes illicit trade concerns: Evidence shows tax hikes have limited impact on illicit trade, which depends more on enforcement.
  For example: India’s 2017 tobacco tax hike didn’t boost illicit trade significantly.
• Creates long-term behavioral change: Sustained tax policies promote reduced consumption habits over time, influencing generational shifts toward healthier lifestyles.
  For example: France’s continuous tax hikes cut smoking rates by 30% over two decades.

Shortcomings of taxation in being effective in addressing related public health issues

• Limited effectiveness in rural areas: In rural areas where tobacco consumption is higher, a GST rate hike may not be enough to curb usage, as consumers may not be impacted by modest price increases.
• Inequality in tax burden across products: Uneven tax burdens, such as lower taxes on beedis compared to cigarettes, may lead to substitution rather than reduction in consumption.
  For instance: Consumers may switch to cheaper ‘beedis’ if taxes on cigarettes are raised disproportionately.
• Lack of consumer education: Taxation does not necessarily address the root causes of harmful consumption, such as lack of awareness.
  For instance: Even with higher taxes, the consumption of tobacco may remain high among habitual users, especially in rural areas.
• Failure to address broader socio-economic factors: Taxation alone does not address underlying factors like addiction or social acceptance of harmful products.
  For instance: Tobacco use remains widespread in India despite taxes due to cultural norms and addiction.

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Way Ahead

• Implement a mixed tax structure (GST + excise taxes): Combining ad valorem (GST) taxes with specific excise duties will create a more effective framework to reduce consumption.
  For example: Countries like the UK have used a mix of VAT and excise duties to curb tobacco use effectively.
• Gradually increase tax rates to the maximum permissible level: Raising GST rates to the peak rate of 40% for tobacco and sugar-sweetened beverages can significantly impact consumption and generate more revenue.
  For example: A 40% tax could help curb tobacco use further, aligning with global health recommendations.
• Strengthen enforcement against illicit trade: Improving tax administration, monitoring, and enforcement can reduce the adverse effects of illicit markets on public health.
  For example: South Africa successfully reduced tobacco smuggling through stricter regulations and enforcement.
• Incorporate public health awareness campaigns: Taxation should be complemented with robust education campaigns to raise awareness about the harms of tobacco and sugary products.
  For example: India’s “Tobacco Free India” campaign can be intensified alongside tax reforms to foster behavior change.
• Introduce complementary health-focused levies: In addition to GST, the government can consider imposing specific health-related levies, such as a sugar tax, to further discourage the consumption of unhealthy products.
  For example: Mexico’s sugar tax has led to a decline in sugary drink consumption by 5-10%.

While higher GST rates on tobacco products and sugar-sweetened beverages can reduce consumption, their full potential in addressing public health issues depends on comprehensive strategies, including public awareness and improved healthcare infrastructure. As the saying goes, “Prevention is better than cure.” Taxation should be paired with educational campaigns and accessibility to healthier alternatives for sustained impact on public health.

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