A Rational Taxation System of Bidis and Cigarettes to Reduce Smoking Deaths in India

Tobacco smoking of bidis and cigarettes causes about one million deaths a year in India. India's relatively high consumption is due in part to a historically low or no tax on bidis and an inefficient, complex system of taxing cigarettes. In the context of planned tax reforms in India, we provide specific recommendations to raise tobacco taxes and to adopt a simpler and more efficient tax administration that would curb smoking. We estimate that raising the tax as a percentage of retail price from 7% to 33% for bidis and from 43% to 58% for cigarettes would conservatively lead to about 14 million smokers quitting and 27 million children never starting, thereby saving some 69 million years of healthy life over the next 40 years. The increase would also raise about Rs 73 billion or an additional 1.2% of current government revenue, while incurring no or minimal economic harm. Modest action on tobacco taxes in India might well save millions of lives. S moking bidis or cigarettes accounts for nearly one million adult deaths a year, or about 10% of all deaths at all ages (Jha et al 2008). The current patterns of tobacco use in India are a consequence of a significant informal economy, struc - ture of taxation, poor information systems and ineffective regu- lation of tobacco products. Tobacco-attributable deaths have fallen sharply in the last two decades in most high income coun- tries in response to comprehensive tobacco control efforts. Higher taxation of tobacco products is the single most effective intervention to reduce consumption (Jha 2009). Additional com- ponents of comprehensive tobacco control include complete bans on smoking in public places; prominent, graphic warning labels and public education campaigns that warn people about the dangers of tobacco use; comprehensive bans on tobacco advertis- ing, promotion; and support for smokers trying to quit (Jha and Chaloupka 1999). Improved health is a key development goal of the Government of India (GOI). Moreover, GOI has recently begun major reforms of its taxation structures including introduction of value added taxation on goods at the state level and proposes to introduce a goods and services tax at both central and state levels (Rao 2010). Thus, now is an appropriate time to conduct a systematic review of tobacco use and the current taxation structure, and to recom- mend specific reforms. Here, we review the key economic issues related to tobacco use and its regulation in India. Our chief conclusions are that substantially higher and smarter excise taxes of bidis and cigarettes would prevent millions of premature deaths, raise additional revenue, and that higher taxation would incur minimal economic costs. We first review the consumption patterns and health conse - quences of smoking in India, followed by the rationale for taxa- tion and the current chaotic tax structure. We describe our pro- posed tax reforms in detail and provide empirical analyses of the effects that a more rational system of higher taxes would have on consumption, tobacco mortality, and revenue. We discuss three common objections to higher taxes on tobacco, and provide two specific recommendations.