Compensation cess on tobacco products can generate Rs 49,740 crore, GST council told

Public health groups along with doctors and economists have urged the GST Council to increase compensation cess on all tobacco products which is expected to raise an additional Rs 49,740 crore as tax revenue.

This increased revenue could significantly contribute to the soaring need for compensation by different states during the pandemic and to disburse the dues already owed by the Centre, they said.

Compensation cess is a part of the GST regime to compensate manufacturing states for loss in tax revenue.

As an extraordinary measure, they have appealed to the GST Council to apply the compensation cess on bidis and also increase the existing compensation cess applied on cigarettes and smokeless tobacco products during the upcoming meeting of the council.

Covid-19 appears to be one of the biggest economic shockers India may have ever experienced, Rijo John, economist and health policy analyst, said.

The GST revenue receipts of both central and states governments have been severely affected due to the pandemic and, as a result, the Centre has not been able to distribute the compensation cess dues to different states as guaranteed under the GST, he said

"Unprecedented financial resources will be needed for the country to recover from the economic shock Covid-19 has created.

"Even though imposing additional taxes on the general public might not be a viable policy option when consumption needs to be boosted, compensation cess on tobacco could be a win-win measure as it will discourage tobacco consumption while bringing in substantial revenue for the government," John said.

He added that a Re 1 compensation cess per stick of bidi and significant cess hike on cigarettes and smokeless tobacco products are expected to generate additional tax revenue to the tune of Rs 50,000 crore.

Ashim Sanyal, the chief operating officer of Consumer VOICE said increasing compensation cess on all tobacco products, including bidis, is a winning proposition for the government as it will provide the much needed additional tax revenue for Covid-19 stimulus package while motivating millions of tobacco users to quit and preventing youngsters from taking up tobacco consumption.

Increasing taxes on all tobacco products will not only reduce their affordability and therefore consumption but also to limit the increasing health and fatal damages caused by it, Dr Harit Chaturvedi, Chairman of Max Institute of Cancer Care said.

Tobacco smoking is a known risk factor for many respiratory infections and increases the severity of such diseases.

"Early evidence from China and Italy has found that patients with underlying health conditions and risk factors, including smoking and diseases linked to smoking, maybe at a greater risk for severe outcomes or death from Covid-19," Dr Chaturvedi said.

WHO recommends total taxes to represent at least 75 per cent of the retail price for all tobacco products.

"Currently, the total tax burden (tax expressed as a percentage of the final retail price) is only 49.5 per cent for cigarettes, and 63.7 per cent for smokeless tobacco in India, well below the minimum recommended by the WHO.

"Bidis, on the other hand, enjoy an extremely low tax burden of only 22 per cent despite being at least as harmful as cigarettes, and are smoked by almost twice as many Indians as cigarettes, resulting in estimated annual economic costs from diseases and deaths to the tune of Rs 805.5 billion," John said.

Dr Chaturvedi added, "There is ample evidence about bidis being the killer and not the pleasure of the poor. These should be made unaffordable for the poor to save them from a lifetime of misery and suffering."

India has the second-largest number of tobacco users (268 million or 28.6 per cent of all adults in India) in the world. Of them at least 12 lakh die every year from tobacco-related diseases, he said.