Being already taxed very heavily, the avenue for more revenue through increased excise tax rates is now not feasible.

MUMBAI, May 14: Continuity in policy, at least in terms of the direction of tax reform, is one of the outstanding features of this year's budget. The finance minister is aiming to provide the right incentives for higher growth and more vigorous economy.

However the finance minister's announcements on tobacco taxes are confusing, and also inconsistent with previous policies. The confusion relates to the government's objectives with reference to tobacco taxes. Is it to maximise excise revenue, or is it based on health or other non-revenue criteria? The Budget fails on both counts.

Tobacco provides substantial tax revenue. This can be increased by either changing tax rates or by bringing more items under taxable status. The profile of tobacco use in India is unlike any other country in the world.

While elsewhere, the bulk of tobacco consumption is in the form of cigarettes, in India it is in the form of bidis or chewing tobacco, snuff and other forms. These two segments generally escape the tax net, since they are in the unorganised or small scale sector. Thus the excise tax is mostly borne by smokers of cigarettes in India, who are estimated to be about 13 per cent of all tobacco smokers. India has one of the highest rates of taxation among countries imposing a specific tax on cigarettes. In fact 55 per cent of the price of cigarettes in India represents excise. Cigarettes contribute nearly 10 per cent of total excise to the exchequer.

Being already taxed very heavily, the avenue for more revenue through increased excise tax rates is now not feasible. Tax revenue can then be increased by bringing more smokers of tobacco in the tax net. If the finance minister had health effects in mind, then tax on cigarettes or bidis should be linked to tar and nicotine content. More than four times as much tobacco is consumed as bidis or gutkha, as compared to cigarettes. The tendu leaf wrapper of bidis is also a significant source of tar. Aggregate delivery of tar and nicotine is much higher through avenues not touched by the taxman.There are five important facts about the tobacco market that no economic or tax policy can afford to ignore. First, the international market for tobacco exports is US $ 30 billion of which India's exports are merely half a percent. This despite the fact that India is among the top four producers of tobacco in the world. Second, the consumption of tobacco world-wide, in various forms, has been increasing at the rate of 2 per cent per year. This is marginally higher than the growth rate of the population. In some developing countries, including India, this rate is even higher.

Third, countries like the US have tried to discourage smoking and the use of tobacco' domestically, but at the same time their Department of Agriculture has actively supported tobacco production for exports. This policy is also seen in other tobacco producing countries. Fourth, in India, the tobacco crop provides higher returns than almost all other cash crops including cotton, chillies, groundnuts etc. in the regions that it is grown. Because the FCV type of tobacco is purchased though the government run Tobacco Board, farmers do not have to wait to get paid for their crop. Fifth, the bulk of India's domestic consumption of tobacco is in the form of chewing tobacco or smoking bidis. The bidi sector is taxed very lightly.

This implies that the revenue potential of the tobacco sector has not been fully realised. Presently, cigarettes account for less than 26 per cent of the tobacco that is smoked. According to FAO projections, tobacco consumption in India is likely to grow 2.4 per cent per annum. Thus, even if cigarette consumption grows at 10 per cent per annum, the bidi sector's employment will remain unaffected. It is also worth noting that employment in the bidi sector is of lower quality and productivity and gives lower net returns to farmers who grow bidi tobacco. The employment in this sector is also characterised by relatively poor working conditions for women and has the incidence of child labour. Such an employment pattern cannot persist in the long run, whatever the tax stance of the government.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.