01 Jul 2025 : GST reform and unfinished business in tobacco control

 Editorial 1: GST reform and unfinished business in tobacco control

Context

Simplifying tax rates should fix flaws in tobacco taxes while balancing the needs of the economy and public health.

Introduction

As India completes eight years of the Goods and Services Tax (GST) since its launch on July 1, 2017, it is a good time to reflect on this major reform. GST replaced many indirect taxes like VAT, excise duty, and service tax, bringing them under one system. This helped create a unified national market under the idea of “One Nation, One Tax.” The reform made tax rates uniform across states, made it easier to do business, and strengthened economic links between different parts of the country. GST has also become a steady source of income for the government. In 2024–25, the gross GST collections reached a record ₹22.08 lakh crore, showing a year-on-year growth of 9.4%.

• Beyond just collecting revenue, GST has improved economic efficiency.
  • It removed the problem of cascading taxes (tax on tax) by using the input tax credit system.
    → This helped lower production costs, which benefits both businesses and consumers.
• Compliance has become easier due to digital systems, such as the e-way bill, making tax filing simpler and helping reduce tax evasion.
• Removing inter-State checkpoints has made logistics faster, cutting transport time by up to 20% and bringing down transport costs.

Faultlines in taxation

• Cigarettes: 54% tax
• Smokeless tobacco: 65% tax
  • All are below WHO standards.

Structural Problems in Tobacco Taxation under GST

1. Heavy Dependence on Ad Valorem Taxes

• GST mostly uses ad valorem taxes (tax based on price).
• But specific excise taxes (fixed amount per unit) are better at reducing harmful product use, like tobacco.
• Ad valorem taxes allow the industry to manipulate prices, reducing the effect of taxation on consumer behaviour.

2. Decline in Central Excise Share Since GST

• The drop in excise share has weakened the public health impact of tobacco taxation.
• Many countries with GST/VAT add specific excise taxes to tobacco for health reasons.

3. Inequity in Tobacco Taxation

• Cigarettes make up only 15% of tobacco users but generate over 80% of tax revenue.
• Bidis, mostly used by low-income groups, are under-taxed despite being equally harmful.
• Bidis are not covered under the GST Compensation Cess, unlike other tobacco products.
• This lack of cess has no health-based justification.

4. Upcoming Threat: Compensation Cess Expiry

• The GST Compensation Cess may end in March 2026.
• This cess contributes around 50% of total tobacco taxes (especially for cigarettes).
• If withdrawn, it will make tobacco cheaper, hurting public health efforts.

5. Stronger, Smarter Tax Policy

• Raise GST rate on tobacco to 40%, the maximum allowed under GST law.
• Add or increase specific excise taxes to strengthen public health impact.
• Adopt a mixed tax system (both ad valorem + specific excise).
  → Proven to be more effective in:
  • Reducing consumption
  • Increasing tax revenue
  • Avoiding price manipulation

Rethinking Tobacco Taxation Amid GST Reforms

1. Myth of Illicit Trade and Higher Taxes

• The tobacco industry claims that higher taxes lead to more illicit trade.
• But independent studies show that illicit cigarettes make up only 2.7% to 6.6% of the Indian market.
• This is far lower than the industry's exaggerated claim of 25%.
• Research evidence indicates that:
  • Tax hikes have limited impact on illicit trade.
  • Better enforcement, governance, and regulations matter more.

2. India’s Global Commitment

• India has signed the WHO Protocol to Eliminate Illicit Trade in Tobacco Products.
• It must now prioritize implementation to close regulatory loopholes and prevent tax leakages.

3. GST Council's Opportunity: Prioritise Public Health

• As the GST Council works on rate rationalisation and structural reform, public health should be a key focus.
• The Parliamentary Standing Committee (139th Report, September 2022) noted that:
  • Tobacco remains highly affordable in India.
  • There is a critical need to raise taxes on all forms of tobacco.

Recommended Strategy for Reform

Why It Matters

• This approach would:
  • Lower health and economic costs of tobacco use
  • Boost fiscal consolidation
  • Show India’s commitment to both health and developmental goals
• As GST completes 8 years, this is a timely chance to fix existing gaps in tobacco taxation.
• Doing so would help evolve GST into a more powerful tool for public health and fiscal reform.

Conclusion

As GST completes eight years, reforming tobacco taxation is both urgent and strategic. Aligning GST with public health goals through higher rates and specific excise duties can reduce consumption, boost revenue, and curb health costs. With the 2026 cess expiry nearing, the GST Council has a timely chance to fix gaps and reaffirm India’s commitment to health and fiscal responsibility.