Uniform rate of cigarette excise under GST in India

Objective The Government of India’s plan to implement a Goods and Services Tax (GST) is a major step towards a modern tax system. It will be important from a public health and fiscal perspective that GST is at least ‘revenue neutral’ with respect to tobacco taxation. In this paper, we calculate revenue neutral central excise rates on cigarettes under different GST scenarios, including the GST Committee’s recommended 40% demerit rate. Methods We use the WHO Tax Simulation model to estimate total tax revenues from cigarettes in financial year (FY) 2016–2017. This revenue outcome was increased by 5% to set an inflation-adjusted revenue neutral target for FY 2017–2018. We then introduce GST together with a uniform excise on cigarettes to generate this target amount of tax revenue. Findings We estimate that tax revenue from cigarettes will amount to Rupees (INR) 368 billion in FY 2016– 2017 (INR 149 billion in Value Added Tax and INR 219 billion in excise). The revenue neutral target for FY 2017–2018 is therefore INR 388 billion. If India were to adopt a 40% GST rate on tobacco in FY 2017–2018, then a uniform excise of INR 2225 per 1000 cigarette sticks would be required to generate the target amount of total tax revenue. Conclusions The implementation of GST is a golden opportunity for India to adopt best practices in related areas of taxation. A uniform excise on cigarettes as described here would be an essential component of an efficient and effective tax system for India.