The proposed 35% GST slab on high-tax products like tobacco and aerated drinks is counterproductive and poses serious risks to India’s economy, employment, and tobacco control efforts.
High taxes on cigarettes will push consumers towards cheaper, illicit alternatives and will give fuel to the smuggled market. India’s legal cigarette industry, which makes up only 10% of overall tobacco consumption but contributes 80% of tobacco tax revenue, is under threat from high taxes and a growing illicit trade.
Cigarette tax hikes have been significant, with excise rates increasing by a CAGR of 15.7% between 2012-2017, followed by hikes of 20% in 2017, 13% in 2020, and 16% in 2023. This aggressive taxation has made legal cigarettes unaffordable, driving consumers to the smuggled market. India now has the fourth-largest illicit cigarette market, costing the government an estimated Rs. 21,000 crore annually, with the total illegal tobacco market valued at over Rs. 30,000 crore.
According to studies by Euromonitor International and Alvarez & Marsal (2024), in India, 90% of tobacco consumers can afford products in the Rs 0.50 to Rs 4 per unit range, making them opt out of highly-taxed products in favour of lower-quality cheap tobacco.
The growth of smuggled cigarettes has reduced demand for Indian-grown tobacco, causing job losses and a decline in farmer income. From 2013 to 2023, the decline in tobacco production resulted in a loss of 238 million man-days of employment. Tobacco contributes over Rs 72,000 crore in tax revenue (2022-23) and Rs 12,000 crore in foreign exchange (2023-24). According to ASSOCHAM, the sector adds Rs 17 lakh crore to India’s economy, including its direct and indirect contributions.
The majority of tobacco consumed in India (68%) comes from the unorganized sector, which pays little to no tax due to exemptions or evasion, making regulation difficult. The legal cigarette industry and a small portion of bidi and smokeless segments fall under the organized sector. Even within these segments, tax-paying manufacturers are disadvantaged compared to non-compliant players.
Tobacco leaves are taxed under GST’s reverse charge mechanism, but non-FCV tobaccos, used in bidis and smokeless products, often evade regulation. Regulating these tobaccos like FCV tobaccos would help bring them fully under the tax net.
India’s high cigarette taxes have fuelled illicit trade and hurt local communities. A balanced approach to taxation could restore the legal market, reduce illegal trade, and boost government revenue.
