The Government brought in historic tax reforms with the introduction of the Goods and Services tax in 2017, promoting simplicity, while reducing the tax burden.

Government data indicates that Gross GST collection in October rose 9% to Rs 1.87 lakh crore, the second-highest ever.

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As per some media reports, the Group of Ministers (GoM) on GST Rates Rationalisation has recently proposed a new slab of GST at 35% over and above the existing 4 slabs to products such as aerated drinks and tobacco products considered as demerit goods. The recommendations of the GoM is perplexing since it is purportedly meant to be focusing on rationalisation of rates.

Countries tend to tax so called ‘sin’ products (products which are addictive by nature and those which are not good for public health) due to primarily two reasons, one is to increase revenue collection without much change in demand, since these products tend to be inelastic to costs ( i.e. increase in prices do not affect consumption significantly) and two with the policy objective of making such taxes an effective economic deterrent / making them less attractive to their consumers and hopefully pushing such consumers to safer alternatives.

It is pertinent to note that most major economies with GST or GST like taxation regimes tend to have lesser number of slabs and in any case have a significantly lesser top slab for taxation rate.

As per a cross-country World Bank study on sugar-sweetened beverages, India has one of the highest tax rates for carbonated soft drinks (CSDs) at a total tax rate of 40 per cent as of 2023.

Countries like the UK and France have adopted a layered tax approach, charging a high tax for higher sugar content, while charging a lower tax for lower sugar content. Growing awareness of preventive health has seen consumers switching to lower sugar content products, creating a new market for healthier aerated beverages.

However, a uniform tax on sugar carbonated drinks inhibits producers from investing and innovating to produce products with low sugar content due to the high tax rate. A layered tax approach will enable producers to invest in manufacturing these products, leading to more jobs, and consequently more revenues for the government. It will also bolster innovation and promote public health, while increasing revenues for the government.

The analysis of WHO data as published by Tobacco Institute of India, shows that as a percentage of per capita GDP, the taxes on cigarettes in India is one of the highest in the world. While that has brought down the cigarette industry’s market share of the total tobacco market in India from 21% in 1982 to about 10% around 2023-24, the tobacco consumption in the country for the same period has grown by 49%.

Therefore, it is clear that taxation burden on the tobacco industry is almost always aimed purely at cigarettes since it is the only portion of the tobacco industry which is well organised and represented by well governed formal structures. In the absence of alternatives, consumers are more likely to veer towards unregulated, imported cigarettes mostly produced in China or counterfeit cigarettes which is currently growing rapidly in India.

The TII handbook on illegal cigarette trade suggests that the government loses about Rs 21,000 crores in revenues annually to illegal cigarettes and counterfeits which do not bear the pictorial warnings and are cheaper due to tax evasion. They are also not regulated and therefore riskier for the consumers.

Further, by leaving millions of its citizens without safer alternatives or a government funded path to cure, the government will be abrogating its citizens’ rights under Article 21 of the Constitution by effectively snatching away all dignified options from its cigarette smoking citizens. It is safe to say that such high GST slab at least at the level of being a useful deterrent, misses the woods for the trees from a policy objective perspective,

In conclusion, lower rates encourage businesses to be compliant whereas higher rates encourage tax evasion. Moreover, the introduction of the 35% slab will be counterproductive to tax simplification. At a time when India needs a fillip for growth, it will be prudent for the GST Council to consider a moderate tax regime, that will increase tax collections and bring the economy back on its growth trajectory.

Written By Pingal Khan, Co- Founder and Partner at Ashlar Law.
(The opinions expressed here belong solely to the author and do not reflect the views of The Statesman)