All about the Concept of Sin Tax

Ashish M. Shaji

19 Feb, 2022

Have you ever noticed that cigarettes or alcoholic drinks cost more than their cost of production. The reason behind this is a significant amount of their price comprises of tax which is levied at a higher rates. It’s also called Sin Tax. In this article, we will discuss the concept of sin tax.

Meaning of Sin Tax

A sin tax refers to the tax levied on goods or services that are harmful for the society. These goods and services on which sin tax is levied include tobacco, alcohol, sugar-added drinks and gambling. The main objective behind imposing this tax is connected with public health purposes i.e., to discourage the consumption of harmful products by making them unaffordable to consumers.

Revenue from Sin Taxes

Government adds up to its revenue by imposing high taxes on these products. The additional government revenue from sin taxes is utilised to cover societal costs incurred due to the consumption of harmful goods. Moreover, revenue from such taxes help government to implement certain social programs like raising awareness on the bad effects of smoking, drinking, chewing tobacco etc.

Usually, sin taxes are imposed as value added taxes on harmful products like alcoholic drinks, cigarettes etc. These are also considered as regressive taxes as these sort of taxes put more burden on poor population but less burden on wealthier population.

Sin Tax in India

India levy high tax on sugar carbonated beverages, and under the current GST structure, certain sin goods attract additional cess which includes products like tobacco, pan-masala, aerated drinks etc.

Indian population accounts for about 270 million people aged 15 and above who intake some form of tobacco products. Tobacco has become one of the major risk factors for chronic diseases like cancer. In India, it accounts for 1.3 million deaths every year as per a WHO report. Hence tobacco products fall under the highest slab of 28% as it attracts heavy cess. This cess is paid by the central government to the state government to compensate for the loss of revenue due to GST implementation.

A cess of 65% is levied on unmanufactured tobacco bearing a brand name whereas it is 160% for scented zarda. Further, a cess of 204% is levied on pan masala having guthka, and the current cess on cigarette is 5% plus- up to Rs. 4170 per 1k sticks. The total tax burden as a percentage of the final tax-inclusive retail price is 52% for cigarette, 22% for bidis and 63% for smokeless tobacco.

What India imposes is still lower than the tax burden recommended by WHO^[1] (at least 75% of the retail price for all tobacco products). In the month of October, the Indian government had formed a panel to draft a comprehensive tax policy proposal covering tobacco products from the perspective of public health.

Alcohol is taxed separately by states and it has been kept out of the purview of GST. Taxes on alcohol form a major source of revenue for states. As per a RBI report, all states and Union Territories had budgeted a total of Rs 1,75,501.42 crore from state excise on liquor during 2019-20.

Moreover, profit from online betting and gambling are taxed at a rate of 30% without accounting for basic exemption limit of 2.5 lakhs under the income tax rule.

Global examples-

Countries like the UK, Sweden and Canada impose Sin Taxes on a variety of products and services, from tobacco to alcohol to lotteries, gambling and fuel, which chip in with sizeable revenues. In 2013, Mexico had imposed a Soda Tax.

Advantages and Disadvantages of imposing sin tax

Every aspect can be weighed on the scale of advantages and disadvantages. Similarly, levying sin tax involves both these-

Advantages

• These kind of taxes discourage people from engaging in unhealthy behaviours. Consequently, health issues associated with the consumption of unhealthy products also decline significantly.
• It also helps government to add up to their revenues. Government can use such revenue to subsidise healthcare.
• Sin taxes are also more viable option to raise government’s revenue than raising other type of taxes like income tax.

Disadvantages

• As said earlier, these are regressive taxes which discriminate against the poor people by putting a huge burden on them as compared to wealthier people.
• Imposition of this form of taxes can give rise to illegal activities such as smuggling etc.
• These taxes also don’t affect the consumer behaviour equally as some may stop the consumption of harmful products but not necessarily others.

Sin Tax- Budget 2022

The Finance Minister, announced her fourth budget for the financial year 2022-23 recently. Before the budget is presented, usually, the stock market becomes anxious as it fears an increase in the sin tax however, this year the cigarette manufacturing businesses, especially index heavyweight ITC, climbed up to 3.5% on the Bombay stock exchange as the government kept the taxation rates for sin products untouched.

Conclusion

So the concept of Sin tax has two pronged objectives one is of course to deter the consumption of harmful products, and the other objective is to use the funds generated from these taxes to fund welfare programmes. To support the rationale of the government, evidence from other countries that had imposed such taxes shows that the consumption of cigarettes and soft drinks has fallen significantly, after the new tax.

Read our Article:Section 269SU of the Income Tax Act