Tax hike raises risk of smuggling of tobacco products and revenue loss for govt: Experts

India's government often faces a delicate balancing act between generating revenue, promoting public health, and ensuring economic stability. The recent significant tax hike on cigarettes, effective February 1, exemplifies this complex challenge. With a new excise duty structure combined with existing GST leading to an estimated 60-70% increase in cigarette prices, experts have voiced concerns that this measure, while aimed at public health, could inadvertently fuel illicit trade and result in substantial tax revenue losses.

**Background Context and What Happened:**

Tobacco control has been a consistent public health priority for the Indian government. India is a signatory to the WHO Framework Convention on Tobacco Control (FCTC), committing to implementing measures to reduce tobacco demand and supply. Taxation is widely recognized as one of the most effective tools for tobacco control, as higher prices can deter consumption, especially among youth and lower-income groups. Historically, India has levied excise duties on tobacco products, which, after the introduction of the Goods and Services Tax (GST) in July 2017, were retained alongside GST. The GST regime applies a 28% tax rate on tobacco products, in addition to a compensation cess, and specific excise duties continue to be imposed on cigarettes and other tobacco products by the Union government. The latest move, announced in the Union Budget, increased the National Calamity Contingent Duty (NCCD) on cigarettes, leading to the substantial overall price hike effective from February 1.

**Key Stakeholders Involved:**

Several stakeholders are directly impacted by or involved in this policy decision. The **Government of India**, particularly the Ministry of Finance and the Ministry of Health & Family Welfare, is at the forefront. The Ministry of Finance aims to boost revenue and manage fiscal deficits, while the Ministry of Health & Family Welfare champions public health initiatives and aims to reduce the burden of tobacco-related diseases. The **tobacco industry**, including manufacturers (both domestic and multinational) and distributors, faces increased operational costs and potential market contraction for legal products. They are also concerned about the unfair competition posed by illicit trade. **Consumers**, particularly smokers, are directly affected by higher prices, which might prompt some to quit, but could also push others towards cheaper, unregulated, and often more harmful smuggled products. **Law enforcement agencies**, specifically Customs and Directorate of Revenue Intelligence (DRI), bear the responsibility of curbing smuggling and illicit trade, an already challenging task that becomes more arduous with higher price differentials. Finally, **public health advocates and civil society organizations** generally support higher tobacco taxes for their health benefits but are equally concerned about the potential rise in illicit trade undermining these very benefits.

**Significance for India:**

This policy holds significant implications for India. Economically, while the primary intent is revenue generation and health improvement, the risk of substantial tax revenue losses due to smuggling is a serious concern. Illicit trade bypasses all taxes (excise, GST, cess), depriving the government of crucial funds. It also harms the legitimate tobacco industry, potentially leading to job losses and reduced investments. Socially, smuggled tobacco products often lack mandatory health warnings, quality controls, and age restrictions, thus circumventing public health regulations and potentially exposing consumers to greater health risks. The presence of a thriving illicit market also poses a governance challenge, fostering organized crime and black money circulation. India already has a significant illicit tobacco market, estimated by various industry reports to be around 25-30% of the total market, and this hike risks expanding it further.

**Historical Context and Constitutional Provisions:**

India has a long history of grappling with tobacco control. The Cigarettes and Other Tobacco Products Act (COTPA), 2004, is the cornerstone legislation, regulating advertising, promotion, sponsorship, sales to minors, and smoking in public places. Taxation, as mentioned, has always been a key tool. Globally, there's evidence that while higher taxes reduce consumption, excessively high taxes without robust enforcement can lead to a surge in illicit trade. India's tax framework is rooted in constitutional principles. **Article 265** of the Indian Constitution mandates that no tax shall be levied or collected except by authority of law. The power to levy excise duty on tobacco products by the Union government is derived from the Seventh Schedule (Union List), while the GST framework, introduced by the **101st Constitutional Amendment Act, 2016**, governs the indirect taxation mechanism. **Article 47** under the Directive Principles of State Policy also directs the State to endeavor to improve public health, including the prohibition of intoxicating drinks and drugs which are injurious to health, providing a constitutional underpinning for tobacco control measures.

**Future Implications:**

The success of this tax hike in achieving its dual objectives of revenue generation and public health improvement hinges critically on the government's ability to curb illicit trade. Future implications include increased pressure on enforcement agencies to strengthen surveillance and interdiction efforts. If the revenue loss becomes substantial, or if public health outcomes are undermined by increased access to unregulated products, the government might need to re-evaluate its strategy. A balanced approach would involve not just taxation but also robust enforcement, public awareness campaigns, and international cooperation to combat cross-border smuggling. The long-term impact on public health will depend on whether consumers quit or switch to illicit, unregulated products. This policy serves as a significant case study in the complexities of fiscal policy, public health, and governance in a developing economy like India.