Introduction to GST
The Goods and Services Tax (GST), introduced in India on July 1, 2017, marked a significant tax reform. It replaced multiple indirect taxes like VAT, excise duties, and service tax, creating a unified national market under the "One Nation, One Tax" framework.
Economic Impact of GST
- Revenue Generation: GST collections reached ₹22.08 lakh crore in 2024-25, showing a 9.4% year-on-year growth.
- Economic Efficiency:
- Reduced production costs through the input tax credit system.
- Improved compliance with digitized processes like e-way bills.
- Enhanced logistics by removing inter-State checkpoints, cutting transportation time by 20%.
Tobacco Taxation Concerns
- Health Impact: Tobacco causes over 3,500 deaths daily and an economic burden of ₹2,340 billion annually.
- Current Taxation Issues:
- No significant tax increases on tobacco since GST introduction.
- Pre-GST period saw a 17% decline in tobacco use due to regular tax increases.
- Current tax rates are below WHO's recommended 75% of retail price (22% for bidis, 54% for cigarettes, 65% for smokeless tobacco).
- Heavy reliance on ad valorem taxes makes GST ineffective for tobacco control.
Structural Issues and Recommendations
- Tax Structure:
- Specific excise taxes are more effective than ad valorem taxes in reducing harmful consumption.
- Cigarettes, though constituting 15% of users, contribute over 80% of tax revenue, while bidis remain under-taxed.
- Solutions:
- Raise GST rates on tobacco to the peak of 40% and enhance specific excise taxes.
- Implement a mixed tax structure combining ad valorem and specific components.
Illicit Trade and Governance
- Studies suggest illicit cigarettes form only 2.7% to 6.6% of the market, contrary to industry claims of 25%.
- Governance quality and enforcement are key to combating illicit trade, not just tax increases.
- India has ratified the WHO Protocol to Eliminate Illicit Trade in Tobacco Products, which needs prioritization.
Conclusion
The GST Council's deliberations on rate rationalisation offer an opportunity to address tobacco taxation shortcomings. Increasing GST rates and specific excise duties on tobacco would mitigate health and economic burdens while aligning with developmental goals.