Bidis will smoke out the poor, for sure

Why the exemptions? It’s tobacco, and it’s harmful   -  Brijesh Jaiswal

A lower GST rate for bidis than for cigarettes will hurt the health of millions. The bidi sector’s economic benefits are overstated

While the GST Council is still debating the structure of rates and preparing the list of goods to be exempted, there is overarching consensus that demerit goods such as tobacco need to be taxed at the highest rate. However, there has been plenty of speculation on whether or not a 40 per cent or higher GST could be applied to bidis as well.

Bidis have been enjoying their status as the ‘poor man’s cigarette’. However, it is not hard to see that bidis are a bane and keeping them under a low tax regime is not only detrimental to public health but also anti-poor. Hand-made and machine-made bidis attract an excise tax of ₹16 and ₹28, respectively, per 1000 sticks. With nearly 98 per cent of the bidis consumed being hand-made, it amounts to a weighted average excise of ₹16.2 per 1000 sticks. The excise rate on bidis has not changed in the past five budgets while that on all other tobacco products has witnessed substantial increases. This means, bidis are more affordable today than before.

Then, there is VAT imposed by the States. While some States exempt bidis from VAT, the average rate is around 19.6 per cent. If we take ₹13.24 to be roughly the average retail price of a pack of 25 bidis, the total excise + VAT burden (tax expressed as percentage of final retail price) on bidis can be calculated as 19.5 per cent.

Exemption regime

This should be seen in the context of the WHO technical manual on tobacco tax administration that recommends that tobacco excise taxes should account for at least 70 per cent of the retail price. Hence, even with 40 per cent GST rate on bidis, its post-GST tax burden would remain far below the level recommended by WHO.

A more important concern, however, is the third category of bidis which are fully exempt from excise taxation. Section 3A of the Bidi Workers Welfare Cess Act 1976 allows for cess exemption (and excise) for those who manufacture less than two million unbranded bidis a year, a loophole that has been historically misused.

The Government’s own records attest to the level of distortion that has occurred due to this exemption. A report by the Ministry of Labour in 2011 notes “this exemption should go because even the larger manufacturers are splitting their manufacturing facility to get this exemption”.

By some estimates, the excise paid consumption of bidis in India is about 448 million sticks a year. More than 55 per cent of the bidis consumed are currently either excise tax-exempted or excise tax-evaded with the deliberate manipulation of splitting manufacturing units into smaller units.

Poor man’s smoke? Really?

There is a widespread misconception that bidis are “a poor man’s smoke” and taxing it is tantamount to taxing the poor, thus making such taxes regressive. However, a closer examination reveals that this argument is untenable.

Firstly, the estimates of price responsiveness show that bidis are far more price responsive than cigarettes. That is, a given tax increase would reduce the consumption of bidis more than that of cigarettes. This is because the poor are more price sensitive due to their limited income.

Secondly, scientific studies show several diseases are associated with bidi consumption. Compared to similar non-smokers, bidi-smoking males and females lose six and eight years of life, respectively. Bidi smoking is considered to cause about 2-3 times greater nicotine and tar inhalation than conventional cigarettes do, due to the poor combustibility of the bidi wrapper and greater puff frequency needed to keep the bidi alight. Since the poor have limited ability to finance treatment of their ailments, it is imperative to reduce their exposure to bidi smoking lest it risks keeping them in perennial poverty.

Thirdly, bidi rolling and associated activities are known to cause a variety of health issues through exposure to nicotine and unburnt bidi tobacco. Respiratory diseases, finger numbness and bone-related problems are a few.

Fourthly, the exploitative practices prevalent in bidi manufacturing exposes women and children to several risks to their health, life and future. A labour ministry report in 2011 notes “rampant exploitation of bidi workers on a multiple of scores like under-payment of wages on per thousand bidis rolled by them, rejection of bidis rolled on one pretext or the other, denial of social security benefits/schemes, avoidance of full payment and denial of other statutory amenities/facilities”. The report also notes that children forego their education to meet the target of rolling 1000 sticks a day.

Yet another argument often put forward against raising bidi taxes is about its potential impact on employment. Even if one were to keep aside the rampant exploitation of bidi workers, the contributions of bidi manufacturing to the economy are clearly often overstated.

Data suggest that the bidi industry employs about 3.4 million full-time workers who constitute 0.7 per cent of employment in all sectors. Only in West Bengal, Jharkhand, Madhya Pradesh and Karnataka does full-time bidi employment constitute more than 1 per cent of total employment. Bidi manufacturing firms contributed only about 0.6 per cent of the gross value added by the manufacturing economy.

Obviously, these numbers indicate that increased taxes on bidis are unlikely to make any major impact either on economic growth or employment. The existing workers could be absorbed into other sectors in the economy since tax increases and the resultant decrease in bidi demand would take place only gradually over a period of time. On the other hand, the benefits of increased taxes can’t be overstated. According to the health ministry, the total economic burden on account of tobacco in India is about ₹1,04,500 crore of which ₹81,132 crore was attributed to smoked tobacco. Considering that 85 per cent of the smoked tobacco consumption is in the form of bidis, one can imagine the economic burden bidi-smoking imposes on the nation’s economy.

On the same footing

Since bidis constitute 85 per cent of the smoked tobacco consumption, the rate of GST they attract will have a direct consequences on overall tobacco consumption in the country and the tax revenues generated. Its direct effect on public health cannot be emphasised enough. It also saves several crores in terms of economic costs averted. Removing the existing small producer exemptions that is widely misused can also increase the GST base substantially.

There is no reasonable public health or economic rationale to keep taxes on bidis any lower than on cigarettes or other tobacco products. What is important is to give the public health message that all tobacco products, including bidis, are sin goods and need to be treated equally and taxed at the highest possible rate. Giving bidis privileged treatment in terms of reduced GST rate or exempted status would inadvertently give the wrong public health message that bidis are ‘special’ and not as bad.

The writer is an assistant professor of economics at IIT-Jodhpur

Published on October 31, 2016

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