New Delhi. The government has once again shown strictness regarding cigarette prices in India. During the ongoing discussion in Parliament, Finance Minister Nirmala Sitharaman clearly said that cigarettes should not be cheap under any circumstances. As soon as the compensation cess of GST is abolished, the total tax burden will automatically reduce and to fill this gap, the government is bringing back excise duty.
The minister’s argument is that before GST in India, tax on tobacco was increased every year so that people stay away from this habit. But in the GST law, the maximum limit of tax on cigarettes is fixed at 40 percent. If compensation cess is removed, the tax burden will fall and prices may come down. The government wants to stop this because it could weaken the public health strategy.
Government’s clear message
During the discussion in the Lok Sabha, the Finance Minister said that if the compensation cess is removed then the tax burden will become lighter, especially when the limit of 40 percent is fixed in GST. He said,
We do not at all want cigarettes to become cheaper.
He said that tax should be such a thing that keeps people away from smoking and reduces health risks.
Sitharaman said that before GST, tax on tobacco was increased every year in India so that its purchase remained difficult. He said,
Before GST in India, tobacco rates were increased every year. This is completely a health related matter. The purpose behind this is that taxes and prices should create a kind of fear so that people do not fall into this habit. Now, as soon as the compensation cess is abolished, we are bringing back the pre-GST excise duty.
Why could cigarettes have become cheaper?
The government says that due to the fixed GST limit, companies would have scope to reduce prices. Tobacco prices have not increased much in comparison to income in the last few years. This means that as income increased, cigarettes became more affordable. If the cess was removed, the burden would be further reduced and prices would come down.
What in the world is going on
The minister also said that many countries increase tobacco tax every year so that the real price does not fall. In Australia and New Zealand this tax is linked to inflation, whereas in the European Union it is necessary to keep excise tax at least 60 percent of the retail price. India also used to follow a similar structure before GST in which the government used to increase taxes every year so that the health policy remained strong.
With the return of excise duty, the total tax burden on cigarettes will remain the same as it currently is due to compensation cess. This means that prices will not come down and there will be no pressure on companies to reduce prices. The government believes that this will maintain the deterrent mechanism regarding smoking and will not have any impact on public health goals.
