Executive Summary
The government of India came up with a law in the form of the Prohibition of Smoking in Public Places Rules, 2008 via Notification No. GSR417 (E) dated 30th May, 2008 issued by Ministry of Health and Family Welfare. This law was enforced on the auspicious occasion of anniversary of the birth of independence hero Mahatma Gandhi, who was known for his ascetic habits. i. e. on 2nd October, 2008. India has had laws against smoking in public places in place for some time, but they have not been enforced strictly. India is the third-largest tobacco producer and consumer in the world after China and the United States. The point of debate arises that whether this ban on smoking is actually feasible or not.
The government could have opted for other measures in order to curb smoking and reduce consumption of all kinds of tobacco products. These include the imposition of tax on consumption of tobacco. Many experts believed that the government could have gone for this model of tax on tobacco rather than ban on smoking in public. The government is hoping to achieve its objective of a smoke free environment & better health for the people. The relative efficacy between the ban on public smoking and tax on tobacco is debated and many socio-economic, cultural and demographic factors are taken into consideration to get an insight into the consumer’s behavior.
Ban on Public Smoking or Imposition of Tax on Tobacco, which of these should be adopted keeping in view the needs of country like India.
Facts about Smoking in India
Smoking kills 900,000 people every year in India, and unless corrective action is taken soon that number will increase to 1 million smoking-related deaths annually by 2010 and beyond, according to a study published in the New England Journal of Medicine and conducted by scientists from India, Canada and the UK. For the study, 900 field workers gathered information from a sample of 1. 1 million homes in all parts of India.
Smoking may soon account for 20 percent of all male deaths and 5 percent of all female deaths among Indians between the ages of 30 and 69. About 61 percent of men who smoke can expect to die between the ages of 30 and 69, compared with only 41 percent of non-smoking men who are similar in other ways.
About 62 percent of women who smoke can expect to die between the ages of 30 and 69, compared to only 38 percent of non-smoking women. On average, men who smoke bidi—the popular hand-rolled cigarettes that contain about one-quarter as much tobacco as a full-sized cigarette—shorten their lives by about six years. Men who smoke full-sized cigarettes lose about 10 years of life. Bidi-smoking women shorten their lives by about eight years on average. Smoking 1-7 bidis a day, for example, raised mortality risks by 25 percent while smoking an equal number of cigarettes daily doubled the risk of death to 50 percent.
As well as the human costs of smoking, the economic costs of smoking in India are also staggering The annual health costs for treating tobacco related cancers, coronary artery disease and chronic obstructive lung disease is conservatively estimated at INR27,761 Crore (US $6. 5Billion). Smoking really exacts a high price on the health and economic wealth of our country. The above facts compelled the government to enforce a comprehensive ban on smoking in public places. Annual average number of consumption per adults.
Issues Discussed
The main issue raised here is to weigh the effectiveness between ban on smoking and tax on tobacco. It is striking to note that a steep social class gradient for all forms of tobacco use exists. Further bidi and smokeless tobacco use are more common among the poorest sectors.
The law of demand holds good for consumption of cigarettes and bidis in India. There exists an inverse relationship between price and consumption of both the products. Since both are substitutes of each other, there exists a cross-elasticity relationship. If tax on cigarettes is raised people can easily substitute it with bidis and vice versa. From 1970-71 to 1997-98, cigarette taxes have recorded a 14 fold increase (i. e. from Rs 31 to Rs 439 per 1000 cigarettes). This has attracted smokers towards bidis. There are no examples of successful efforts to reduce bidi consumption. The reasons are complex: Tobacco excise taxes effectively influence consumption.
But bidis and smokeless tobacco are currently taxed at very low levels to “protect the poor. ” If taxes are to be part of a control strategy, a serious political effort will be required to focus taxes where they will discourage use. If bidi taxes are kept very low, further increases in tobacco taxes may lead consumers to switch to bidis. This requires urgent attention. Strong pressure from tobacco interests can be expected as bidi and smokeless tobacco excise taxes are increased. Similarly, bans on tobacco advertising and promotion, included in the new Indian Laws, will have no impact on bidi or smokeless tobacco consumption but will pre-empt future advertising of these products.
The proposed ban on smoking in public places will have no effect on smokeless tobacco users and probably minimal effect on bidi consumption unless accompanied by a major educational program that effectively targets the poorest sectors of society in their work and living settings. The revenue earned due to imposition of tax is eventually spent on public health programmes and as a result the purpose remains solved. The people who are addicted to cigarette smoking will any which ways continue to smoke as the tax imposition will not continue to affect them in a significant way. As we can see in the last graph, the quantity demanded decreases as the price of tobacco increases.Thus we can conclude that the increase in prices of tobacco can bring down its consumption in a small way.
Cross Price Elasticity of Tobacco Products
It is observed that elasticity coefficient for cigarettes are more inelastic in urban India than rural India. All goods have own price elasticities greater than 0. 5 and some of them such as bidis, leaf tobacco have elasticities close to unity. This is a clear evidence to indicate that consumption of addictive goods in India do respond to the changes in prices, though the proportionate increases in price leads to slightly less than proportionate reduction in consumption. Hence prices can be used as an mportant instrument to curtail tobacco consumption. Since cigarettes and bidis are the two very close substitutes and satisfies almost the same needs, hence the price changes in one product have a vast impact on the consumption of other substitute product.
Effects of price changes through taxation Curbing tobacco is critical for health. However, two counteracting objectives of the government with respect to tobacco viz. , tax revenue and employment become crucial while formulating policies to regulate tobacco use. Using the price elasticity estimates and some appropriate assumptions it is possible to calculate the movement of tax revenue and consumption of various tobacco products.
A larger rate of increase in retail price is required for cigarettes than bidis to arrive at the revenue maximizing level of prices because cigarettes are much more price-inelastic than bidis. While the above estimates are subject to the strong assumption of constant price elasticity they nevertheless point to the potential for increasing taxes in order to curb consumption without losing out on revenue.
In our country, cigarettes taxes are not much below the revenue maximizing level, whereas the current level of taxes on bidis is far less than the revenue maximizing level. One argument usually given against taxing non-cigarette tobacco is the fact that it is mainly used by the poor, hence increasing bidi taxes would amount to taxing the poor more, given the addictive nature of its consumption.
But the price elasticity estimates that increase in prices of bidis (say by taxation) would have the effect of reducing consumption almost by an equally proportionate rate which effectively would mean better health and more disposable income with the poor. Also the government cannot keep increasing the tax as that would mean losing out on votes. The above analysis clearly brings out the fact that raising taxes do have multiple benefits. It has the potential to increase tax revenue while decreasing the consumption. At the same time there are also arguments against raising taxes beyond a point.
Tax Burden
An economic term for division of tax burden is between buyers and sellers. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax. Tax incidence reveals which group, the consumers or producers, will pay the price of a new tax. For example, the demand for cigarettes is fairly inelastic, which means that despite changes in price, the demand for cigarettes will remain relatively constant. Let’s imagine the government decided to impose an increased tax on cigarettes. In this case, the producers may increase the sale price by the full amount of the tax.
If consumers still purchased cigarettes in the same amount after the increase in price, it would be said that the tax incidence fell entirely on the buyers. In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to “fall” upon the group that, at the end of the day, bears the burden of the tax. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. For example, a tax on apple farmers might actually be paid by owners of agricultural land or consumers of apples.
Well, it is not necessary that the burden of tax will always fall on the final customer; instead it is sometimes shared by the producer as well as the seller. Moreover, it also depends on the rate of tax. If the rate of tax is very high, then generally it is being shared by the producer as well as the consumer which ultimately falls on the consumer. Effect of Taxes on Buyer. Taxes on a Buyer are commonly excised through a sales tax as a percentage of the price of the good. The imposed cost by the government affects the equilibrium by shifting the demand curve downward by the size of the tax, as shown in Graph A below. The tax burden is shared by the seller and buyer; the seller receives less for the good in the new tax equilibrium, while the buyer pays more for the good.
Here we can see that the price which a consumer used to pay before taxes were increased was less than the price which they are paying now. Initially the demand curve was Demand1, but when the prices of tobacco increased due to rise in taxes, the demand decreased (Demand2) and the demand curve shifted to its left. Effect of Taxes on Producer. Taxes on the producer are not directly levied on the buyer but on the seller. This creates an upward shift in the supply curve by the amount of the tax, and creates a new equilibrium in the market. With the upward shift of the supply curve the demand moves from a greater quantity to a lesser quantity. This increases the buyer’s purchase price while simultaneously lowering the amount received by the seller.
The burden of the tax is still shared by the seller and buyer as shown in Graph B below. [pic] Well, in Graph B we can say that when the price of tobacco increased due to increase in rate of taxes the supply increased leading to a new equilibrium with tax ultimately leading to a higher price being paid by the buyers. Ban on Smoking India has implemented a comprehensive ban on smoking at public places with effect from 2nd October 2008. The ban has been implemented in public areas which include workplace, hotels, shopping malls, railway stations, airports etc. However, this has not completely stopped consumption of tobacco as people are consuming alternative forms of tobacco.
This implementation, as expected, has brought about fierce opposition from prospective smokers. Government interference with personal lifestyle or property rights Critics emphasize the property rights of business owners, drawing a distinction between public places (such as government buildings) and privately-owned establishments (such as bars and restaurants). Citing economic efficiency, some economists suggest that the basic institutions of private property rights and contractual freedom are capable of resolving conflicts between the preferences of smokers and those who seek a smoke-free environment, without government intrusion.
Bans may move smoking elsewhere Bans on smoking in offices and other enclosed public places often result in smokers going outside to smoke, frequently congregating outside doorways. Also as mentioned in the case, bans on smoking in public places may lead to more smoking at home.
Flaws in Implementation of Law
The ban has not been implemented effectively. People have managed to find loopholes in the system which they have manipulated to fulfill their needs. There is a serious lack of policing at the ground level. A fine of $4 is too little for most of the public and they don’t mind paying it.
Some smoking ban opponents concede that in many localities, the number of smoke-free bars and restaurants is insufficient to meet the needs and wants of residents who prefer a smoke-free environment. In order to encourage the creation of more smoke-free businesses, some experts and politicians support tax credits and other financial incentives for businesses that enact non-smoking policies.
Policies such as substantial tax credit for businesses that choose to ban smoking or a significant additional licensing fee for bars and restaurants that wished to allow smoking can be proposed. Such policies would help to increase the options for customers and employees who prefer a smoke-free bar or restaurant without infringing on the rights of business owners. The government can also opt to increase its export of tobacco products which would help generate more revenue along with reducing consumption within the country.
Individually, adults can choose to stop smoking, and studies from around the world show that if adults stop before they have developed serious disease then they can reduce their risks of death remarkably. To impact the death rate of smoking significantly over the next few decades, India would need a huge proportion of their smokers to quit.
Programs to reduce smoking rates could be used, including higher taxes on cigarettes and bidis, prominent warning labels, complete bans on tobacco advertising and publicity, complete bans on smoking in public places, and raising awareness of how many lives are lost to smoking in India each year. In particular, pictorial warning labels that can convey risks of smoking to the large numbers of illiterate adults in India who smoke might be a particularly effective strategy.
Also, the national government and state governments should take tobacco appropriately as a cause of death if they choose to implement effective policies against it, this could substantially reduce premature deaths in India. Finally, no matter what measures the government takes, it’s the people of India who will eventually make a difference.
Tobacco inflicts high direct and indirect costs on society due to the high morbidity and mortality associated with consumption of tobacco products. Increasing the price of tobacco through higher taxes is the single most effective way to decrease consumption and encourage tobacco users to quit. All tobacco products should be brought under the tax net under a unified Goods and Services Tax (GST) system to remove tax exemptions on hand-made bidis and small scale production of other tobacco products, including smokeless products.
Current taxes on tobacco products should be assessed and rationalized to bring in revenue, help reduce poverty and bridge income inequalities. Taxes collected from tobacco products can be used to support health promotion and tobacco control programme. The Government needs to strengthen and upscale its current pilot initiatives on alternate cropping and alternate livelihoods to replace tobacco farming and bidi rolling, to reaffirm its commitment to tobacco control and reduce tobacco use.
Conclusion
Taxation of tobacco is recognized as one of the most important price measure to regulate tobacco consumption. However tax base of tobacco in India is heavily depended on fifteen per cent of the tobacco users who represent cigarettes smokers. Analysis of price responsiveness of various tobacco products would be helpful to explore the potential of curbing tobacco use by raising taxes.
What is to be noted is the fact that the current level of taxes on tobacco products in India is much lower than the levels at which revenues start falling. Given that non-cigarette tobacco, especially bidis are taxed at very low rate, there is a huge potential to increase its taxes. Taxation of different tobacco products could be seen as a tool to raise government revenue while simultaneously attaining the objective of curbing tobacco consumption.
The objectives of tobacco taxation should be defined in much clearer terms and the emphasis needs to be given on curbing consumption of various tobacco products. Higher rates of increase in taxes may result in smuggling and the government machinery needs to be equipped to handle this. A large scale regulation of tobacco consumption also will have implications on tobacco farming and manufacturing of various tobacco products. Hence a detailed analysis of the economics of tobacco farming and manufacture of various tobacco products would be highly useful to analyze the net effects of various regulatory measures.
