Current GST Rates on Harmful Products
Over the past seven years, GST rates on harmful products like tobacco and sugar-sweetened beverages have remained mostly unchanged, except for minor hikes in National Calamity Contingent Duties (NCCD) on tobacco.
This lack of significant increases has made these products more affordable, undermining efforts to reduce consumption and improve public health.
Impact of Proposed GST Rate Hike
The proposed GST increase from 28% to 35% on tobacco and sugar-sweetened beverages is a positive step for public health and fiscal goals.
The hike is expected to reduce consumption, increase prices, and raise significant revenue (an estimated ₹43 billion annually).
A higher rate of 40% could have a larger impact, reducing consumption further and increasing revenue by ₹72 billion, while addressing disparities in tax rates across different tobacco products.
Concerns and Effectiveness of Tax Hikes
Concerns about increased illicit trade due to higher taxes are largely unfounded, as evidence shows tax hikes have minimal impact on illicit markets.
A combination of factors like tax administration, governance, and social factors plays a larger role in the size of illicit trade than tax rates alone.
Ad valorem taxes (GST) are less effective than specific excise taxes, which are more targeted at curbing consumption.
Need for Broader Tax Reform
India should consider pairing the GST hike with higher excise taxes to create a more effective tax framework, as seen in other countries.
The GST hike on sugar-sweetened beverages is also important for tackling health issues like obesity and diabetes.
To align with global best practices, India should raise taxes on tobacco and sugar-sweetened beverages to 40% and close the tax gap between different tobacco products.
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