Don’t keep punching new holes in gst

Don’t keep punching new holes in gst

The GST Council is besieged with demands from various quarters for commodity-specific exemptions or concessional tax rates on many products. Of particular note is the one for biris (beedis). This is a bad idea, from the viewpoint of both revenue and public health. Tailored exemptions break the GST chain, raise the chances of evasion and generate systemic inefficiencies, beating the purpose of GST. On tobacco products, the plan is to levy the highest tariff of 28% plus a sin tax component of 15% that will not be eligible for input tax credit. This makes sense as it will keep the GST chain unbroken, while dissuading harmful consumption.
Cigarettes account for around 11% of tobacco consumption but contribute 87% of taxes from tobacco. Heavy taxation of cigarettes has brought down cigarette use, but the use of tobacco in general has gone up, raising the healthcare burden. The National Health Policy 2017 seeks to increase the country’s public spending on health from 1.15% of GDP at present to 2.5% of GDP by 2025, with taxes on tobacco being specifically targeted as a potential source of finance.
The sensible thing to do is to tax all tobacco, at the stage of its first sale, on a reverse-charge basis, not to exempt the bulk of it in the name of the poor. Bidis and chewing tobacco are, if anything, more harmful than cigarettes, and making this source of harm cheap by concessional tax treatment makes little sense.
High taxes on cigarettes have an indirect victim as well: tobacco farmers, the demand for whose produce is hit by largescale smuggling of cigarettes into India induced by high taxes on cigarettes. GST excludes real estate, electricity, alcohol and petroleum products in the near term. So, the case to minimise exemptions and concessions is strong.