Article Text
PDF
Abstract
Objective To estimate the trends in affordability of bidis, cigarettes and smokeless tobacco (SLT) in India and examine the impact of transition from the earlier indirect taxation system to the new goods and services tax (GST) on the affordability.
Methods Retail price data and per-capita gross domestic product data were used to examine the trends in affordability of cigarettes, bidis and SLT from 2007–2008 to 2018–2019. Relative income price defined as the share of real per-capita income required to purchase a given quantity of a product was used to measure affordability. Changes in affordability were decomposed to disaggregate the effects of real prices or income changes.
Findings On average, cigarettes, bidis and SLT have become increasingly affordable over the past 10 years. Bidis were found to be nine times more affordable than cigarettes. The GST has accentuated the increase in the affordability of cigarettes and SLT, and did not significantly alter the high affordability of bidis. In general, states with high (low) value-added tax rates during the pre-GST period experienced increases (decreases) in tobacco products’ affordability after GST.
Conclusion Bidis continue to be highly affordable while the affordability of cigarettes and SLT increased mainly due to lack of any tax changes after GST and the growth in per-capita income. To effectively reduce affordability, significant increase in either the excise taxes and/or the compensation cess—a temporary duty in addition to GST—is warranted. Compensation cess should also be applied on bidis to address the huge tobacco use problem in India.
- price
- taxation
- low/middle income country
- non-cigarette tobacco products
- public policy
Statistics from Altmetric.com
Introduction
The goods and services tax (GST) legislation, effective July 2017, was a fundamental landmark legislation that overhauled the indirect taxation system in India. Several indirect taxes such as excise taxes at the national level and value-added taxes (VAT) at the state level were subsumed into the GST. The GST Council, which comprised ministers from both the central and state governments, fixed a statutory (exclusive) ad valorem GST rate of 28% on all tobacco products. It also imposed an additional duty known as compensation cess on few luxury and demerit products including cigarettes and smokeless tobacco (SLT) products. This additional duty was introduced with the special purpose of compensating states for potential revenue shortfalls under the GST, if any, only for a period of 5 years and was not imposed on bidis, the most popular smoked tobacco product used by about 72 million adults.1 For SLT, the compensation cess consisted of an ad valorem tax whereas for cigarettes, it was applied as a mix of both ad valorem and specific taxes with the specific component constituting the major share. Although the 2019–2020 union budget reintroduced excise taxes for tobacco products effective in April 2019, this excise is extremely small or merely symbolic. Besides a minor revision upwards in the compensation cess of cigarettes on 18 July 2017, neither the GST rates nor the compensation cess has been revised for tobacco products.
This is in contrast with the pre-GST tax regime, where excise tax on tobacco products was regularly increased during annual central government budgets. For example, for the most used 60–70 mm cigarette tier, the excise tax was increased at a rate of about 10% or more per year in many years until 2017. In addition, many state governments had moved from low to high VAT regimes on most tobacco products, together contributing to keeping tobacco products’ prices relatively high. An apparent outcome was a 17% relative decline in tobacco use prevalence among adults from 2009–2010 to 2016–2017.1
Notwithstanding such regular increases in taxes under the pre-GST regime, the affordability of tobacco products in India did not decline because these tax increases were not enough to offset both inflation and per-capita income growth. India experienced an average annual growth of about 4.8% in per-capita gross domestic product (GDP) over the past 10 years. Experience from several countries shows that tax increases on tobacco products that only keep up with inflation may not achieve the desired reductions in smoking prevalence,2 whereas substantial tax increases that sharply increase tobacco prices and reduce affordability are more effective at reducing tobacco use prevalence.3 For example, countries such as Ukraine and the Philippines that have substantially and repeatedly increased cigarette taxes and significantly reduced cigarette affordability have experienced sustained reduction in consumption.3
A study4 analysing the simulated impact of GST on tax burden and consumption of tobacco products in India predicted that the GST would increase the price of cigarettes, bidis and SLT by only 0.18%, 8.8% and 6%, respectively, and its impact on the tax burden—defined as the share of the tax in the retail price—would be negligible, except for bidis. The study estimated that the total tax burden would be 53%, 22% and 60% for cigarettes, bidi and SLT, respectively, after the introduction of GST, which is much smaller than the minimum 75% recommended by the WHO.5 Moreover, the compensation cess, most of which is specific, currently represents about two-thirds of the GST burden on cigarettes.4 Because the cess has not been modified, its real value has eroded implying a decrease in the real tax burden on cigarettes. As a result, cigarettes could have become more affordable during the past 2 years. Likewise, in the absence of tax increases on other tobacco products, bidis and SLT could also have become more affordable, after GST.
India is the second largest consumer of tobacco products6 with about 267 million adults consuming tobacco in some form, constituting 28.6% of Indian adults. Smoking and SLT-related mortality is estimated at about 1.3 million every year or approximately 3500 deaths every single day.7 8 The annual economic burden attributable to tobacco use in India is estimated as 1.2% of India’s GDP.9 The enormous burden of tobacco use in India warrants not minor increases in tobacco taxes that only help to partially counter the price inflation, but significant increases that have the effect of decreasing affordability.
One of the earliest studies that examined the affordability of bidis, cigarettes and SLT in India found that these products became more affordable from 2001 to 2007.10 Another study focusing on SLT found that the product became more affordable over the period 2006–2012.11 A more recent study showed that bidis and cigarette affordability continued to increase during 2010–2018, even though their real prices had increased.12 None of these studies, however, examined the impact GST had on the affordability of tobacco products overall or state-wise. Other studies have examined the affordability of cigarettes globally and found that cigarettes were relatively more affordable in India13 and became more affordable over time within India.14 However, these studies were limited in scope in examining the affordability of non-cigarette tobacco products within India.
This paper fills these gaps by examining the trends in affordability of cigarettes, bidis and SLT during 2007–2008 to 2018–2019 at the national and state levels in India and whether the transition to the GST impacted these trends. In addition, it evaluates the contribution of changes in real prices separately from that of income growth to the trends in affordability.
Data and methods
This study uses secondary data to examine affordability of bidis, cigarettes and SLT over time, comparing the pre-GST and post-GST periods. Retail prices of tobacco products were obtained from the labour bureau of the Ministry of Labor and Employment, Government of India (GOI),15 which collects retail prices of about 370 items including few brands of smoked and SLT products, monthly. Prices are obtained from about 300 collection points across approximately 80 centres spread through several states. This is the price data that are used to construct the Consumer Price Index for Industrial Workers (CPI-IW) in India.
The period of analysis is 2007–2008 to 2018–2019, which includes two financial years after the introduction of the GST. Using a simple average of pre-GST affordability based on all 10 pre-GST years, we also forecast a post-GST counterfactual trend for affordability, projecting how affordability might have changed had the transition to GST not occurred. Trends in affordability are calculated at the national and state levels for 20 states for which data were available.
Consumer income and prices are the two determinants of affordability of a product at any given time. When the real price of a commodity decreases, consumers can consume more units of this commodity with the same amount spent earlier. Similarly, real income growth increases consumers’ purchasing power over all goods. Relative income price (RIP) is widely used in the literature16–18 to measure affordability which incorporates the effects of both real price and income changes. For tobacco products, the RIP is defined as the percentage of per-capita GDP required to purchase 100 sticks of cigarettes or bidis, or 100 g of SLTs in a year. An increase in the RIP over a period means a product has become less affordable, and vice versa.
Per-capita national and state GDPs are obtained from the Reserve Bank of India.19 Percentage changes in the RIP over years are also decomposed to identify separately the contributions of changes in real prices (price effect) and changes in income (income effect) in affordability. Income (price) effects are obtained by subtracting the percentage changes in real prices (real income) from those in the RIP in line with previous practice.16 This helps to examine, for example, if changes in affordability after GST were due to changes in prices, or income, or both.
Results
The plain lines in figure 1 show the trends in actual affordability—as measured by RIP—of bidis, cigarettes and SLT from 2007–2008 to 2018–2019. The dotted lines show how affordability would have changed after GST, if affordability had just continued along a simple linear trend forecasted based on average growth in RIP over periods during pre-GST years. The trends reveal that the RIP has followed a declining trend, meaning all products have become more affordable. Compared with the forecasted trend, the rate of decline in the actual RIP was larger in the post-GST years for cigarettes and SLT, and not significantly different for bidis, meaning the GST might have accentuated the already decreasing trend in RIP or increasing affordability of tobacco products. By 2018–2019, two years into the GST introduction, the affordability of bidis, cigarettes and SLT had increased by 2.2%, 3.4% and 8.5%, respectively (in percentage decline in the RIP) compared with 2017–2018, the first GST implementation year.
Trends in affordability of tobacco products in India.
In absolute terms, bidis are much more affordable than cigarettes although both are equally harmful products.20 In 2018–2019, the cost of buying 100 sticks of cigarettes represented 0.41% of the per-capita GDP, while it took only 0.05% of per-capita GDP for 100 sticks of bidis, implying that bidis were nine times more affordable than cigarettes. As the GST currently imposes a compensation cess on all tobacco products except bidis, this could be the primary reason why bidis continue to be highly affordable.
Prior to the GST, taxes on tobacco products varied across states mainly owing to different VAT rates. With the GST, tax rates for a given product became uniform across states. A recent study4 predicted that, after GST, the prices of tobacco products would increase in low-VAT states and decrease in high-VAT states. Figure 2 shows the changes in affordability as measured by the (actual) absolute values of the RIP for bidis, cigarettes and SLT across 20 of the 29 Indian states and union territories. The lines for SLT are missing in states where SLT is banned. As individual graphs in the figure are relatively small, and the value of RIPs is somewhat similar between bidis and SLT, the lines for SLT and bidis overlap in some states. The figures show that cigarettes and SLT became much more affordable in several states after GST, as the corresponding RIP declined. Bidis affordability, however, decreased in some states in the first year after the implementation of the GST only to increase in the subsequent year.
Trends in affordability of tobacco products across Indian states. GST, goods and services tax.
Figure 3 shows the annual percentage change in the absolute values of the RIPs of tobacco products for the past 3 years, two of which were after GST. A dot above the horizontal red line represents an increase in the product’s RIP compared with the previous year, meaning a decrease in its affordability. A dot below the red line represents a decrease in the product’s RIP or an increase in its affordability compared with the previous year. The figure shows that, in general, in states where VAT rates on tobacco products were high prior to GST, these products became more affordable, after GST. For example, states like Rajasthan, Uttar Pradesh, Himachal Pradesh, Madhya Pradesh and West Bengal had cigarette VAT rates much higher than the national average. In these states, cigarettes have become more affordable after GST. By contrast, in states like Andhra Pradesh and Bihar, where cigarette VAT rates were lower than the national average, cigarettes became less affordable, after GST. Likewise for SLT, in states like Rajasthan, Madhya Pradesh and Jharkhand where VAT rates were high prior to the GST, SLT became more affordable after GST. In fact, SLT became more affordable after GST in several states, including in some states such as Punjab, Orissa and Karnataka which had relatively low VAT before GST. This is because VAT or GST rates essentially affect only the price component of the affordability measure whereas the changes in per-capita income growth could more than offset the real price increases and consequently affect affordability.
Annual percentage change in affordability of tobacco products across Indian states. RIP, relative income price.
Bidis, on the other hand, became less affordable in several states in the first year after GST but, by the second year, its affordability either increased or remained stable in 12 of the 20 states. In some states that had low VAT rates before GST, including Chhattisgarh, Himachal Pradesh, Jharkhand, Kerala, Orissa, Puducherry, Uttar Pradesh and West Bengal, bidis have continued to be less affordable than before GST even after 2 years after GST. Although the GST reform had increased the tax burden of bidis to 22%, compared with 16% before GST,4 bidis still became more affordable 2 years into the GST, mainly because there was no tax increase after GST or a compensation cess is not yet applied on bidis, while the per-capita income continued to grow.
Figure 4 decomposes changes in the RIP into the contribution of changes in per-capita income growth and changes in real retail prices at the national level. The thin blue bars indicate the total annual percentage changes in the RIP. If positive, the RIP has increased compared with the previous year or the product has become less affordable, and vice versa. For bidis, and only in the first year after the GST, the increasing effect of real prices on the RIP more than compensated the decreasing effect of income, contributing to a net increase in RIP or fall in affordability. In other words, including bidis in the 28% GST category along with other tobacco products helped in reducing the affordability of bidis only in the first year after GST. By the second year, this increasing effect of prices on the RIP was no longer sustained and the net RIP declined, making bidis relatively more affordable compared with previous year. This was likely due to the lack of additional increases in taxation since the GST or the lack of having a compensation cess applied on bidis.
Decomposition of the change in affordability due to price and income. RIP, relative income price.
The real prices of SLT decreased, which together with a growth in per-capita income contributed to reduce the RIP after GST. In the absence of any more revisions in taxes, these effects will likely continue to cumulate and increase the affordability of SLT moving forward. Although the real prices of cigarettes increased to some extent after GST, this increasing trend was not able to compensate the per-capita income growth, resulting in a net decline in RIP or increase in affordability of cigarettes in both the years after GST. This contrasts with the pre-GST years, when the increasing effect of real cigarette prices more than compensated the effects of income growth, resulting in a net reduction in affordability in at least some years. With no change in GST rates and other tobacco taxes, the affordability of cigarettes and other tobacco products will likely continue to increase.
Discussion
The GST reform was an overhaul of the indirect taxation system in India, therefore its goal was not to modify the tax burden on any product in particular, but rather simplify the indirect tax system. However, like other demerit goods, tobacco products generate negative externalities to society, which justifies a specific tax system for tobacco products, designed to reduce their use. Prior to the GST, central excise taxes and several state VATs used to be increased regularly. The resulting price increases were able to compensate part or all of the increases in real income growth, hence decreasing the affordability of tobacco products at least in some years. India experienced a 17% relative decline in tobacco use prevalence from 2009–2010 to 2016–2017, a period which also witnessed considerable increase in tobacco taxation both by the central and several state governments.
Although this study provides evidence of increasing affordability of tobacco products after GST, it also suffers from some limitations. First, the retail price data used for the analysis are the ones collected for CPI-IW whose main objective is to measure the cost of living among workers in different industrial sectors. Its coverage of rural areas may be limited. To this extent, the average prices may not be truly representative of the country. Nevertheless, since the objective is to examine the trends in average prices, and not their absolute values, and to the extent real prices changed proportionately in rural and urban areas, this limitation might not significantly affect our conclusions. Second, the retail prices of cigarettes in this study represent mostly that of the 65–70 mm long tier, while other tiers of cigarettes are also available in the market. As a result, average cigarette prices used in the analysis are not representative of prices across different tiers. Nevertheless, this tier has a market share of close to 60%. Third, the GST was introduced on 1 July 2017, whereas the financial year in India is from 1 April to 31 March. Hence, the first quarter of the financial year 2017–2018 analysed after GST belongs to a period prior to the GST. The lack of availability of quarterly data limits our ability to strictly segregate the period before and after July in 2017. However, since the analysis includes the remaining three-quarters and a full financial year 2018–2019 after GST, the trends after GST may not change in spite of this minor timing difference. Notwithstanding these caveats, this paper provides an empirical evaluation of the short-run impact of the GST on the affordability of tobacco products in India.
Conclusion
This paper provides the first formal analysis of the impact of the transition to GST on the affordability of bidis, cigarettes and SLT in India, at the national and state levels. It shows that the GST had a limited impact on real prices for cigarettes and SLT, and noticeable impact on bidis only for 1 year. In addition, increase in real income has completely overshadowed the price effects, resulting in increased affordability of cigarettes and SLT by the first year itself and bidis by the second year after the GST. Clearly, the GST reform did not reduce the already increasing trend in the affordability of cigarettes and SLT products in India, and did not change the very low levels of affordability of bidis. If anything, the GST has aggravated the increasing trends in affordability for tobacco products as evidenced by the predicted counterfactual linear trend. Several states with high VAT before GST experienced increases in affordability after GST, and vice versa.
To be fair, the intent of the GST reform was not to change the affordability of any products in particular. Nevertheless, reducing the affordability of harmful products such as tobacco is highly justified to reduce their negative externalities on societies. The absence of any significant changes in tax rates for tobacco products since GST poses a greater challenge to tobacco control efforts of the GOI and will likely undo some of the previous gains in reducing tobacco use prevalence during the pre-GST years. Our calculations show that, with no tax changes in past 2 years, the tax burden on cigarettes has declined to 49% compared with the earlier 53%.4
The lack of a compensation cess on bidis under the GST is helping it to continue as a highly affordable product which is as harmful and detrimental as other tobacco products. This study shows bidis, smoked by more than 70% of Indian smokers, are nine times more affordable than cigarettes in 2018–2019. Bidi smoking is also known to generate an annual economic cost amounting to INR805.5 billion (US$12.4 billion) in India which is 0.5% of its GDP.20 Thus, applying compensation cess on bidis is highly justified under the GST, thereby bringing some parity in taxation and affordability between tobacco products.
The union budget 2019–2020 has reintroduced excise taxes for tobacco products. However, the rates are extremely small and will have no significant impact on increasing tobacco products’ prices. For example, the new excise tax is INR5 per 1000 sticks for cigarettes,21 whereas the average excise tax on cigarettes was INR2504 per 1000 sticks at the time of the GST introduction.4 Similar is the case of reintroduced excise taxes on bidis and SLT. Despite being insignificant, the reintroduction of excise taxation is an opportunity for the central government to unilaterally revise these rates in future, unlike the revision in GST rates which needs concurrence of GST Council which consists of ministers from different state governments and central government. Very large increases in excise taxes are warranted to compensate for the absence of any tax increases in the past 2 years, and reverse the increasing trends in affordability. Hence, significant tax increases with the objective of aligning the taxes on all tobacco products—cigarettes, bidis and SLT—in order to make each of those products equally unaffordable are warranted. Such changes will help sustain the tobacco use prevalence reduction previously achieved during the pre-GST years, and enable India to achieve the targeted 30% prevalence reduction by year 2025 envisaged in the 2017 National Health Policy.22
What this paper adds
What is already known on this subject
The indirect tax system in India was overhauled with the introduction of goods and services tax (GST) during July 2017. There has been no change in the taxes on tobacco products in India ever since. It is a departure from the pre-GST regime where taxes on tobacco products used to be regularly increased either through the central excise taxes or state-level value-added taxes (VAT) or both.
What important gaps in knowledge exist on this topic
There is no scientific analysis of the impact GST had on the trends in affordability of different tobacco products at the national or state level in India. Such evidence-based research is needed in order to support increased taxation and sustain tobacco use prevalence reduction that India experienced in the past decade.
What this paper adds
This paper finds that the GST has accentuated the increase in the affordability of cigarettes and smokeless tobacco products, and did not alter the high affordability of bidis mainly due to lack of any tax changes after GST as well as the growth in per-capita income. Bidis were found to be nine times more affordable than cigarettes. In general, states with high (low) VAT rates during the pre-GST period experienced increases (decreases) in tobacco products’ affordability after GST.
Footnotes
Contributors RMJ and ED conceived the research idea and finalised the methods. RMJ analysed the data and wrote the first draft. Both authors contributed to the interpretation of results, drafting and finalising the manuscript.
Funding The Campaign for Tobacco-Free Kids.
Competing interests None declared.
Patient consent for publication Not required.
Provenance and peer review Not commissioned; externally peer reviewed.
Data availability statement All data relevant to the study are included in the article or uploaded as supplementary information. Available data from public domain were used for the analysis. http://labourbureaucpi.gov.in provides all price data and https://www.rbi.org.in/ has data on gross domestic product.