Estimated impact of the GST on tobacco products in India

To examine the potential impact of the goods and services tax (GST) on price, consumption and tax revenue from tobacco products in India and across states.

Data on prices, tax rates and tax revenue are used to estimate a benchmark scenario prior to the GST implementation in 2017-2018. Using own-price elasticity of demand for tobacco products, we estimate the impact of GST at the state level and the aggregate state-wise impact to obtain the national level impact.

We predict that the statutory GST rate of 28% plus compensation cess will increase the price of cigarettes, bidi and smokeless tobacco by 0.18%, 8.8% and 6%, respectively, and, as a result, it will reduce the weighted average consumption by 0.3%, 10% and 6% and increase tax revenue by 0.17%, 35% and 4.7%, respectively. Most states will experience a fall in tax revenue from tobacco products by more than 50% compared with the value-added tax revenue they collected pre-GST. The GST compensation cess will have to be used to compensate states' revenue shortfalls.

The GST has increased the complexity of the tax system for tobacco products. In particular, for cigarettes, the specific cess constitutes the majority of tax revenue, and therefore, it must be revised regularly to protect revenue and keep real prices from falling. In addition, India should reintroduce excise taxation on all tobacco products, at least in part, on top of the GST, to make them less affordable and to smooth the transition after the expiration of the compensation cess.