Context

• As India commemorates the eighth anniversary of the Goods and Services Tax (GST) on July 1, 2025, it is timely to evaluate this transformative tax reform.
• Launched in 2017 under the banner of ‘One Nation, One Tax,’ the GST replaced a complex web of indirect taxes, establishing a unified national market and harmonising tax structures across states.
• While its economic and administrative efficiencies are undeniable, its shortcomings, especially in tobacco taxation, reveal a critical blind spot that calls for urgent corrective measures.

Goods and Services Tax (GST): A Landmark in Tax Reform

• By replacing multiple indirect taxes such as VAT, service tax, and excise duties, GST streamlined tax collection and reduced the compliance burden for businesses.
• The creation of a common national market significantly improved the ease of doing business and enabled more seamless inter-state trade.
• Notably, the digitisation of processes, through instruments like the e-way bill, enhanced transparency and curtailed tax evasion.
• These measures collectively contributed to improved logistics efficiency, cutting transportation time by up to 20% and lowering associated costs.
• The gross GST collections for 2024–25 soared to an unprecedented ₹22.08 lakh crore, registering a year-on-year growth of 9.4%. This consistent revenue generation underscores GST’s role as a cornerstone of India’s fiscal architecture.

The Fault Lines in GST’s Structure

• Tobacco Taxation and Public Health
  • Tobacco usage in India remains a catastrophic public health concern, accounting for over 3,500 deaths daily and imposing an annual economic burden of ₹2,340 billion, equivalent to 1.4% of GDP in 2017.
  • However, the GST regime has failed to meaningfully escalate taxation on tobacco products, a proven strategy for reducing consumption.
  • Pre-GST (2009–2017), regular hikes in excise duties and VAT contributed to a 17% decline in tobacco use.
  • In contrast, post-GST stagnation in tax hikes has made tobacco increasingly affordable.
  • Average GST revenues from tobacco over the last five years stood at ₹551 billion, substantially lower than the associated health and economic costs.
  • The overall tax burden on tobacco products remains below the World Health Organisation (WHO) recommended threshold of 75% of retail prices: just 22% for bidis, 54% for cigarettes, and 65% for smokeless tobacco.
• Structural Flaws: The Ad Valorem Trap
  • The structural design of GST heavily relies on ad valorem taxation, levies based on product value, which, while integral to GST, is poorly suited for curbing harmful product consumption.
  • Fixed specific excise taxes, levied per unit of product, are internationally acknowledged as more effective in reducing tobacco use because they resist industry manipulation of retail prices.
  • Since GST's inception, the share of specific central excise duties in tobacco taxation has plummeted: from 54% to 8% for cigarettes, 17% to 1% for bidis, and 59% to 11% for smokeless tobacco.
  • This decline is compounded by glaring inconsistencies.
  • Although bidis are the most widely consumed smoked tobacco product in India and equally harmful as cigarettes, they are under-taxed and exempt from the GST compensation cess.
  • This omission disproportionately benefits low-cost tobacco products consumed by the economically disadvantaged, amplifying both health inequity and fiscal inefficiency.

The Way Forward

• Dual Strategy for Reform
  • Addressing the deficiencies in tobacco taxation requires a recalibrated strategy that integrates public health priorities with fiscal policy.
  • Raising GST rates on tobacco to the statutory maximum of 40%, as permitted under current law, coupled with a substantial increase in specific excise duties, represents a powerful dual-pronged approach.
  • Such a mixed tax structure, combining ad valorem and specific components, has demonstrated greater effectiveness globally, both in reducing consumption and bolstering revenues.
• Debunking the Illicit Trade Argument
  • A recurring counterargument by the tobacco industry is that higher taxes fuel illicit trade.
  • However, empirical studies refute these claims. Independent estimates suggest that illicit cigarettes account for merely 2.7% to 6.6% of India’s market, far below the industry’s inflated claim of 25%.
  • Factors like regulatory enforcement and border control play a far greater role in curbing illicit trade than pricing alone.
  • India, having ratified the WHO Protocol to Eliminate Illicit Trade in Tobacco Products, must now focus on its rigorous implementation.

Conclusion

• As the GST Council considers rationalisation and structural reform, public health must be brought to the forefront.
• The 139th Parliamentary Standing Committee Report (September 2022) emphasised that India’s tobacco products remain among the most affordable globally and urged higher taxation as a corrective measure.
• The eighth anniversary of GST offers more than a moment of celebration, it provides a critical opportunity to reinforce the GST regime as a dynamic instrument not just of economic efficiency, but also of social responsibility.