India: Chewing Tobacco Taxation In India: Understanding The Complex Tax Structure  

Introduction: -

In India, luxury items frequently bear significant tax burdens due to their high demand among consumers. Said commodities are one of the significant sources of revenue for the government owing to their high value and the proportionately high amount of tax attached to them. However, it may come as a revelation that, there exists a product typically retailed at an MRP of just Rs. 1/- yet is subject to a taxation rate exceeding 300%. It may come as a surprise, but chewing tobacco, which is usually sold as scented chewing tobacco or Jarda, generally in a pouch of Rs.1/- MRP is one of the most heavily taxed commodities in India.

Explanation: -

After the introduction of GST with effect from 01.07.2017, most of the indirect taxes were replaced with one "Goods and Services Tax" with the idea of "One Nation, One Tax". But certain indirect tax levies such as Central Excise Duty and National Calamity Contingency Duty (NCCD) persisted to some extent on tobacco products in addition to GST with the intention of dissuading and discouraging their consumption. To simplify, chewing tobacco is simultaneously subjected to three indirect taxes namely Central Excise Duty, National Calamity Contingency Duty (NCCD) and Goods and Services Tax (GST): -

Illustration: -

I. A manufactures 20,000 pouches of chewing tobacco bearing MRP of Rs.1/- per pouch. The value at which A wishes to sell the product is Rs.0.20 per pouch. The calculation of tax can be done as under: -

II. B manufactures 50,000 pouches of chewing tobacco bearing MRP of Rs.2/- per pouch. The value at which B wishes to sell the product is Rs.0.40 per pouch. The calculation of tax can be done as under: -

Observation: -

It is evident from both the above-mentioned illustrations that the said product is subject to MORE THAN 300% tax as: -

a. On goods having value of Rs.4,000/-, total taxes of Rs.15,257/- are leviable.

and

b. On goods having value of 20,000/-, total taxes of Rs.76,288/- are leviable.

Such rigorous taxation leads to an increase in the per pouch value and consequently, the per pouch value sometimes exceeds the MRP of the product. Illustration of a product exceeding its MRP because of heavy burden of various taxes (as explained above) is given as under: -

(Values from Illustration-I are taken for the sake of convenience in understanding)

*Here the value of the product after all taxes is Rs.1.09/- per pouch which exceeds its MRP value of Rs.1/-. Hence the manufacturers must keep in mind that the total value of the goods after levying all the taxes shall not exceed the MRP value. To absorb the effect of such inflated value, the manufacturers usually resort to reducing the quantity of the product in one pouch to bring down the per pouch rate of the product.

Relevant to mention that said valuation has become more complex after the introduction of MRP based valuation for GST Compensation Cess. Such MRP based valuation has been introduced recently for various commodities including chewing tobacco under the GST law vide Notification No.2/2023-Compensation Cess (Rate), dated 31-03-2023 with effect from 01/04/2023. Prior to the said notification, Cess was also calculated on percentage basis like CGST and SGST and the rate of Cess was 160%. Nonetheless, such an increase in taxes might or might not be a successful attempt to reduce the consumption of chewing tobacco, but it surely contributes to shrinkflation so far as the value of these types of products are concerned.

More so, such heavy taxes also give rise to clandestine removal of such products and huge evasion of taxes on the part of the manufacturer. That in turn, despite bearing any fruit, causes loss to the government exchequer.

Ill effects of the product: -

The aforesaid product is highly addictive and is heavily consumed by people belonging to lower income groups because of its cheap price and easy availability. It contains several carcinogens therefore the consumption of this product leads to serious health problems like mouth cancer and, in many cases, death of the consumer. Because of the same, it has been mandated to print warning signs on the pouches of this product vide Cigarettes and other Tobacco Products (Packaging and Labelling) Rules, 2008. More so, the consumers ought to spit the remains of the product at public places, causing discomfort to the surrounding public, pollution, contamination of water, litter etc.

Despite all the measures taken by the government, the consumption of chewing tobacco is not seen to be reduced. The consumer public remains unbothered and a huge chunk of population in both rural as well as urban areas are seen consuming the same, being completely unaffected by the warning signs. It is also a matter of concern that several children and teenagers who are the future of the country are also actively engaged in consuming this product and facing serious health problems at a very young age.

Conclusion and suggestions: -

The sale of chewing tobacco might be a good source of revenue for the government, but it also a form of huge loss to the government exchequer as well, incurred in the form of healthcare expenses of the consuming public, sanitation & cleaning expenses of the litter caused due to consumption of this product as well as direct loss to the government exchequer caused due to evasion of taxes from clandestine removal of the product. Hence, the following suggestions are given to deal with these problems: -

1. The said product must be completely and unconditionally banned by the government and efforts shall be made to spread awareness and discourage the people from consuming it.
2. If not banned, then it shall be restricted to be sold to people under the age of 24 years & sold near schools, colleges/universities, tuition/coaching centers and religious places.
3. People found spitting in public places shall be subject to stricter punishments.
4. Private places shall place a complete ban on the consumption or spitting of this product inside them and individuals found consuming or spitting the same shall not be allowed to stay within the premises.
5. People who are addicted to this product shall be provided with proper education regarding the ill effects of the product and to persuade them to discontinue its consumption.
6. Awareness campaigns shall be held to make people aware about the health hazards of this product, especially among the young people.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.