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Tobacco

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THE ECONOMICS OF TOBACCO TAXATION IN INDIA

Tobacco taxation in India tends to be low for the most commonly consumed tobacco products. In order to suggest ITC about their strategy for the rural market, we must understand the taxation policies that prevail. India has a tobacco tax structure which is complex, different taxes for hand-rolled versus machine-made bidis, etcetera. In the table given, we observe that bidis are taxed less than filtered cigarettes. At the same time, the tax remains constant for bidis whereas it increases for cigarettes. In table 3.5, we observe that cheaper the tobacco, higher the tax because we assume that cheaper tobacco is more hazardous. But for bidis though the cost is cheap, it is taxed less as it focuses on the mass consumer whose buying potential is less. So its demand is more elastic than the expensive tobacco. Considering the data given in table in 3.1 and 3.5, tobacco products like bidis are less taxed, and it caters to the needs of majority of the consumers. Cigarettes and bidis are consumed by classes of people from different economic strata. Rural markets have a potential for bidis since the lower income group resides more in rural areas. The taxation on bidis is almost constant through the years, it is more profitable to enter the tobacco market through bidis in rural areas..



Own price elasticity in rural areas for bidis is more elastic than in urban areas. For example, an increase of 10% in price will decrease the quantity demanded by 9.2% in rural areas whereas 8.5% in urban areas



Own price elasticity for cigarettes in rural areas is more elastic than in urban areas. Considering an increase of 10% in price, the decrease in demand as per the table would be 3.38% in rural areas and 1.96% in urban areas



Leaf tobacco shows a trend reverse as compared to the other two tobacco products. In rural areas, an increase in price, say of 10% would result in a decrease in quantity by 8.71% whereas that in urban areas by 8.74%(though the change is not that significant)



An increase in the price of bidis by 10% would increase the consumption of leaf tobacco by 0.71% in urban areas. Similarly, an increase in the prices of leaf tobacco will increase the consumption of bidis by 0.11% in urban areas. This indicates that bidis and leaf tobacco are complements. An increase in the price of bidis in urban areas is leading to an increase in the demand for leaf tobacco.



The urban areas are more inelastic than the rural areas since the consumer in urban areas is less likely to be affected by a change in price. He prioritizes the product consumption over the increase in price.



Similarly, cigarettes consumption is more inelastic than bidis. The reduction in quantity of cigarettes is less compared to that of bidis since cigarettes and bidis are consumed by people from different socio-economic status.

Young consumers react to an increase in prices effectively. According to studies, an increase in price of tobacco products is likely to decrease the consumption especially among youngsters below the age of 18. An elasticity of -1.17 for bidis indicates that an increase of 5% in price of bidis would decrease its consumption by 5.85%. An elasticity of -0.17 for cigarettes indicates that a price increase of 15% decreases the quantity by 2.04%.

3) Raising taxes on tobacco products saves lives and increases government revenue. What are the pros and cons of such a view point?

Raising taxes on tobacco products does increase government revenues and decrease the demand for tobacco products. An increase in taxes will deplete the consumption. Health benefits associated with an increase in taxes is progressive. Pros: 1. as the price(tax levied) increases , demand decreases which in turn reduces mortality rate. People tend to live longer than before and their productivity also increases 2. the cost for the treatment of ailments arising from the consumption of tobacco is very high wherein people tend to smoke less 3. the current smokers quit and the number of prospective smokers is less 4. price increase which decreases demand helps reduce deforestation and other costs of cleaning cigarette and bidi litters

Cons: 1. even when the prices are on a rise, the decrease in demand is not significantly low. This leads to people being pushed into poverty as they don’t quit smoking 2. those who reduce consumption of tobacco due to increase in taxes ,in turn smoke more intensively which has no improved effects on the health of these people 3. Government becomes too relevant on taxes which means there really isn’t any incentive to people to quit smoking because the Government has to make up for the revenue 4. increase in taxes might compel tobacco users from lower income group to resort to buying sub-standard goods, switch to the black market, buy inferior goods 5. an increase in taxes make smokers believe they are contributing for the welfare of the society by paying more taxes and thus encourage more smokers

4) Public health v/s Increased revenues. What are the opportunity costs of this trade off?  an increase in taxes does not guarantee lesser consumption of tobacco products. The increase in price of products like cigarettes is generally accommodated in the budget of poor families. Hence the health is actually deteriorating due to the compromise that is made between actual per capita monthly expenditures on tobacco versus other expenditures. This also leads to malnutrition and poverty thereby decreasing public health by a great extent  the Government levies taxes on products in order to increase the revenue. If imposing tax on tobacco products was acting as a deterrent to tobacco consumption, the reduction in tobacco consumption would have been significant by now. A decrease in consumption would lower the revenues which would not serve the purpose of increasing taxes  the opportunity cost of purchasing tobacco at national level: The total expenditure on tobacco for the country as compared to the national expenditures on development, health care, etcetera. The basic needs that could be purchased if the money spent on tobacco was redirected to the basic needs  When the taxes levied increase, manufacturers tend to understate the production count in order to reduce their tax liability. This increases chances of black market, production frauds which cheats the government of tax revenues Smoking provides instant gratification but at the cost of a long-term health risk. Educating people about the ill-effects of smoking, creating public awareness is a step to be taken in this regard. According to the report, there is an “information failure” amongst smokers. Increasing taxes is not the only step to be taken to reduce tobacco consumption, instead educating public about the ill-effects of smoking, printing statutory warning about the health hazard that smoking leads to, will help improve public health. Studies also suggest that making cigarette packs unattractive, plain in colour attracts less consumers. Such steps need to be implemented if public health is of great concern.

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