Tobacco Taxation

Smoking tobacco is a global health hazard and the situation is quite alarming, especially in poor and developing countries. India is home to 10% of the world’s tobacco smokers, representing the second largest group of smokers after China (Sonaliya 2012: 243). A report by the World Health Organization (WHO 2011a: 22) revealed that people with low income smoke more than those with high income. Smoking, being an addiction, affects household decision-making and gender balance while spending already scarce household resources (ADB 2012: 2).

Recent studies suggest that the most cost-effective tobacco control strategy is increasing the price of tobacco products by raising tobacco tax (WHO 2013: 44). Ross, Shariff and Gilmore (2008, 2009) argued that choosing an excise tax that represents at least 70% of the retail price will make a difference with respect to lives saved as well as taxes gained. But in 2012, only 8% of people on the globe (530 million people in 32 countries) were subject to tax rates sufficiently high – constituting 75% of the retail price of cigarettes (WHO 2013: 78-80). According to their estimates,¹ in 2012, excise duty accrues only 24.4% of retail price (Rs 98) of a pack of 20 of the most popular brand of cigarette in India. Studies (Hu and Mao 2002: 11-14; John 2008: 19 quoted in WHO 2011b: 21) have estimated a wide range of price elasticities for tobacco products, indicating that demand is more responsive to price in low- and middle-income countries than it is in high-income countries. John (2008) estimates price elasticity in the range of -0.87 (urban) to -0.91 (rural) for beedis, and -0.18 (urban) to -0.41 (rural) for cigarettes in India. In other words, if the price goes up by 10%, consumption will go down by 8%-9% for beedis and 2%-4% for cigarettes in India.