| PYQ Relevance: Q) “Besides being a moral imperative of a Welfare State, primary health structure is a necessary precondition for sustainable development.” Analyse. (UPSC CSE 2021) |
Mentor’s Comment: UPSC mains have always focused on major issues like the Conflict of interest in the public sector (2017) and Life Expectancy (2022).
Tobacco is responsible for approximately 1 million deaths annually in India, accounting for about 17.8% of total deaths in the country. This includes deaths from both direct tobacco use and secondhand smoke exposure.
The proposal to levy a higher Goods and Services Tax (GST) rate on tobacco products and sugared beverages has sparked significant discussion in India. This editorial explores the implications of such a move, the current tax structure, and the anticipated outcomes of the proposed changes.
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Let’s learn!
Why in the News?
The proposal to levy a higher Goods and Services Tax (GST) rate on tobacco products and sugared beverages has sparked significant discussion in India.
| What is National Calamity Contingent Duty (NCCD)? • It is a type of excise duty imposed by the Indian government on specific manufactured goods, particularly those considered harmful to public health, such as tobacco products and certain beverages. • Established under Section 136 of the Finance Act, 2001, NCCD is intended to generate revenue that can be utilized for disaster relief and other national calamity responses. • In the Union Budget for 2023-24, the government proposed increasing NCCD rates by approximately 16% for specified cigarettes, reflecting ongoing efforts to regulate tobacco consumption through higher taxation. |
Background of the news:
- Over the past seven years since the Goods and Services Tax (GST) was introduced in India, there have been a few significant increases in GST rates for harmful products like tobacco and sugar-sweetened beverages.
- Apart from two small hikes in the National Calamity Contingent Duties (NCCD) on tobacco, the tax rates have largely remained unchanged. This lack of increase has made these products more affordable, which undermines efforts to reduce their consumption.
- In this context, the recent proposal by the Group of Ministers (GoM) to raise the highest GST rate on tobacco and sugar-sweetened beverages from 28% to 35% is a positive development. This increase could help discourage the consumption of these harmful products.
- However, it is important to note that additional tax reforms are necessary to effectively address the public health issues and fiscal challenges associated with tobacco and sugary drinks.
What is the current GST structure?
- Under the existing GST framework, tobacco products and aerated beverages are taxed at a base rate of 28%, with additional cess rates that can range significantly.
- For tobacco, these cesses can be as high as 290%, making it one of the most heavily taxed sectors in India.
- Aerated beverages also face a 12% compensation cess on top of the standard GST rate, leading to a total tax burden that is among the highest globally.
What is the Rationale behind the recent Proposal?
- Public Health Concerns: Higher taxes on tobacco and sugary drinks are often justified by their negative health impacts. Increasing GST rates could deter consumption and promote healthier choices among consumers.
- Revenue Generation: The Indian government is looking for ways to bolster its revenue streams, especially in light of potential shortfalls from other sectors. By raising taxes on these “sin products,” it aims to offset losses from reductions in taxes on essential goods and services, such as health insurance premiums.
- Alignment with Global Practices: Many countries impose high taxes on tobacco and sugary beverages as part of public health strategies. By following suit, India could align itself with global best practices aimed at reducing the consumption of harmful products.
What were the Market reactions to the potential GST Increase?
- Stock Price Impact: Following the news, ITC’s shares fell by about 3%, while Varun Beverages dropped by 5%. This decline reflects investor concerns over how higher taxes might affect profitability.
- Historical Performance: Both companies had previously enjoyed strong stock performance, with ITC’s stock rising 110% and Varun Beverages increasing by 424% in recent years.
- However, the prospect of increased taxation has caused a correction, with both stocks down around 12% from their recent highs.
- Analyst Insights: Analysts believe that while higher taxes could reduce sales volumes, they might also boost government revenues if managed well.
Way Forward:
- Engage with Stakeholders: Regular consultations with industry stakeholders, including manufacturers and health experts, can provide valuable insights into the potential impacts of tax changes and help create balanced policies that consider both public health and economic factors.
- Consider Broader Tax Reforms: The government could explore broader tax reforms that align with health objectives, such as revising tax structures for other products or services that impact public health, ensuring a comprehensive approach to taxation.
- Implement the Proposed GST Increase: The government should proceed with the Group of Ministers (GoM) recommendation to raise the GST on tobacco and aerated beverages from 28% to 35%. This move aims to discourage the consumption of these harmful products while increasing government revenue.
- Enhance Public Awareness Campaigns: Alongside tax increases, the government can launch public health campaigns to educate citizens about the dangers of tobacco and excessive sugar consumption. This could further support efforts to reduce demand for these products.
