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Smoking cigarettes will burn a larger hole in your pocket, govt might levy 50% VAT

Wednesday, 9 July 2014 - 7:00am IST | Place: New Delhi | Agency: dna

With the budget round the corner, it's time for health and tobacco lobbies for the annual ritual: face-off over price hike in tobacco products, especially cigarettes.

In the last two budgets, two steep hikes in excise duty rates for cigarettes have pushed up prices by almost 40%.

And if one were to go by health minister Harsh Vardhan's recent letters to state chief ministers asking them to consider levying at least 50% VAT on all tobacco products, cigarettes prices are most likely to soar again.

Statistics reveal that despite a 9% fall in sales volumes in 2013-14, excise revenue collections have grown almost 2% in the same period.

"Typically, cigarettes are more elastic than other commodities. Studies how that in a country like ours, a price rise of 10% will lead to a 4% dip in sales. However, these are empirical estimates. In India, sales structures need to be overviewed," said Rijo M John, assistant professor at Indian Institute of Technology, Jodhpur, who has done extensive study on the topic.

A study conducted jointly by the Public Health Foundation of India (PHFI) and IIT Jodhpur, helmed by John, found that nationally, the total economic cost of tobacco-related diseases of people aged between 35 years to 69 years in 2011 alone stood at a staggering Rs 104,00,000 crore. Of this, Rs 16,800 crore were direct costs.

States have high and differential rates of VAT on cigarette prices; taxes in various states ranged from 15% to 65%, leading to to inter-state trafficking of cigarettes and tobacco-products. "States must take the health minister's advice seriously. A uniform VAT will curb inter-state trafficking of cigarettes," said John.

"We are still a while away from applying the recommendations of the World Health Organisation (WHO) of levying taxes amounting to 70%," said Monica Arora of PHFI.

"We must continue to levy more taxes, because that might not ensure a drastic reduction immediately, but it will make cigarettes unaffordable and stop initiation into smoking for youth. Increased prices also stop the poor from buying tobacco products."

Tobacco products cause the loss of almost 1 million lives every year, even when the affordability of cigarettes in India being among the lowest, according to a study from the Global Adult Tobacco Survey. India is also the second largest producer of tobaccos, and while cigarettes account for 15% of tobacco consumption, they account for 85% of revenue duty of all tobacco products.

"We must continue to monitor tobacco sales aggressively, so that, keeping in tune to the immediacy of the matter, we can present a healthy report in front of the Global Adult Tobacco Convention in 2015," said Arora.

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