Controlling tobacco will take more than just tax hikes

In a bid to strengthen India’s tobacco control efforts, the union health ministry received a series of recommendations from a designated subgroup last month. The committee proposed an increase in the legal age for tobacco use from 18 to 21 and an escalation of fines and penalties for smoking in restricted areas, as well as the implementation of a ‘track and trace’ mechanism for tobacco products – but was silent on taxation. Of course, these recommendations follow on the heels of finance minister Nirmala Sitharaman’s announcement proposing a nearly 10% augmentation of excise duty on cigarettes and other tobacco products as part of the country’s 2020 budget last month.

Increased taxation, thanks to its ability to reduce demand for tobacco products, is often hailed as crucial to checking the spiralling tobacco epidemic. However, taxes on goods such as cigarettes and alcohol have not on their own achieved the desired results. In 2018, tobacco-related illnesses were responsible for 9.5 % of all deaths in India. Dealing with these illnesses, meanwhile, costs the national exchequers upwards of 13000 crores a year.

Given that stark human and financial toll, taxation is no longer seen as a one-stop-shop solution, as the recommendations to the health ministry illustrated. Instead, the subgroup’s deliberations have confirmed the need for other parallel programmes to boost the effectiveness of tax-related controls.

Boosting tax receipts by attacking illicit trade

While making cigarettes expensive might seem like a natural deterrent, the share of legal or tax-imposable cigarettes in the tobacco market is only 10% of the overall consumption. Moreover, 70% of tobacco consumption is made up of chewable products, not cigarettes. This helps explain why the effectiveness of increased duties has generally been questioned on three grounds: the practice of differential taxation, the impact on the livelihoods of tobacco farmers, and most importantly, the inability to curtail illicit trade.

To begin with, a close examination of taxes on tobacco products reveals that in the absence of blanket taxation, excise duties are differentially imposed on certain categories of cigarettes, such as those of a particular length. In 2014, when Arun Jaitley’s ministry hiked excise duty by 72% on cigarettes under 65 mm, consumers shifted to buying alternatives on which the hike was only 11%. Unsurprisingly, differential taxation produces a negligible change in overall demand and consumer behaviour.

Debates over taxes also tend to overlook the socioeconomic impact of campaigns to reduce the use of tobacco. India is the world’s second-largest tobacco producer after China, and tobacco cultivation supports an estimated 4.57 crore people. As the government strives to reduce smoking rates, it must also reduce the economic dependence of the millions of Indians who count on tobacco for their livelihoods and help them transition to sectors less harmful to the country’s overall health.

Finally, while ‘sin taxes’ are a great source of revenue for the government, poor tax compliance and illicit sales could be costing the treasury more than 9000 crores yearly. Thus, even as it increases taxes, the government must act to constrain India’s illegal cigarette market, which tobacco industry-funded research claims is the fourth largest and the fastest growing in the world. At the same time, officials across India must resist the temptation to work with the industry on this issue.

While tobacco companies consistently claim to oppose the illicit trade in their products, decades of past experience has demonstrated the extent of their complicity in it. Major global tobacco brands have a long track record of flooding some markets with more cigarettes than they can consume, with the expectation that excess stock will find its way across borders to other markets.

Shifting focus to the supply chain with a traceability system

Given that many ‘illicit’ cigarettes are produced by the tobacco companies themselves, India needs to introduce rigorous checks on the supply of these products across the entire distribution chain. To this end, the health ministry heard recommendations last week to implement an traceability system for tobacco products, as outlined by the World Health Organization’s Framework Convention on Tobacco Control (FCTC) and its Protocol to Eliminate Illicit Trade in Tobacco Products. India, which ratified the FCTC in February 2004 and its additional Protocol in June 2018, itself served as host of the FCTC’s Conference of Parties (COP7) and Meeting of Parties (MOP1) gatherings in Noida in 2016.

These systems, also called track-and-trace (T&T), are being implementing by a growing list of countries. Per the WHO’s guidelines, they entail the marking of all tobacco products with tax stamps bearing unique codes and security features comparable to banknotes. These features make it possible to precisely identify each product from the point of manufacture and track them across the supply chain. The stamps help enforcement officials identify contraband products as well as verifying that all applicable taxes have been paid on these products, preventing the under-reporting of cigarette production by both domestic and international tobacco manufacturers. Their security features also dissuade scammers or smugglers who may be tempted to try falsifying them, as well as providing evidence for authorities to prosecute those involved in the illicit trade.

Once deployed, traceability systems can reduce illicit trade and pump tax revenues into the government’s exchequers. Successful examples include Ecuador’s ‘SIMAR’ system, put in place on tobacco products but also on domestic beer and alcoholic beverages. SIMAR made the South American country the first to completely adhere to the FCTC’s traceability protocol. By giving tax authorities in Ecuador access to an unprecedented level of information regarding their own domestic tobacco industry, the SIMAR system has made it easier for them to ascertain and combat flows of cigarettes being illegally imported from neighbouring countries.

Ecuador’s example is being replicated in other parts of the world, including East Africa. Late last year, Kenya completed its implementation of an excisable goods management system (EGMS) that mandates the use of digital stamps on alcohol and tobacco products. The EGMS system enables the advanced monitoring of products at any point of the distribution chain, and has already helped increase revenues from excise duties from nearly Sh700 million ( 50 crore) in its first year of implementation in 2013 to Sh5.6 billion ( 400 crore) in 2019.

Given these positive experiences, health minister Harsh Vardhan would be wise to take up the legal subgroup’s recommendations and apply these measures last week. A secure traceability system on the level of Ecuador or Kenya would strengthen the provisions of the dedicated national tobacco control act, COTPA, and bring India in line with the FCTC treaties is has already signed and ratified. It will also bring India a few steps closer to finally gaining a handle on its smoking epidemic.

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