In India, the livelihoods of farmers, shopkeepers, and workers are tied to every cigarette sold. The Federation of All India Distributors Associations (FAIDA) has proposed imposing GST on the Maximum Retail Price (MRP) of cigarettes. While this may seem like a straightforward tax simplification, it could disrupt the cigarette industry, exert pressure on farmers and shopkeepers, and potentially undermine the GST framework. Unlike oral tobacco products such as chewing tobacco and gutkha, which are taxed based on MRP due to their fragmented and unorganized market, the cigarette industry is well-organized and transparent, already facing one of the highest tax burdens globally. Introducing another layer of taxation could destabilize the existing system.
Nilanjan Banik, a professor at Mahindra University, argues that “GST 2.0 must not repeat past mistakes by adding more tax slabs or increasing peak rates. Genuine reform lies in simplification—aiming for two slabs today and ideally one rate in the future for enhanced compliance and sustainable revenue growth.” A major concern with this proposal is the potential rise in illicit trade. Currently, legal cigarettes represent less than 10% of India’s tobacco consumption. Should prices increase further, more consumers might opt for cheaper, smuggled alternatives, undermining government revenue and exposing them to unregulated, potentially harmful products.
India already grapples with one of the largest illicit cigarette markets, and this proposal could exacerbate the issue by increasing opportunities for smugglers and tax evaders. Alyssamae A. Nuñez, an Economics Instructor at the University of Asia and the Pacific, states, “Our main adversary is the smugglers. Higher taxes lead to increased prices, incentivizing illicit traders to sell more cigarettes to lower socioeconomic groups. Imposing new taxes on the cigarette industry is detrimental to both the industry and consumers. Authorities must take stronger action, as the government cannot afford to tax an industry beleaguered by illegal trade.
Without effective enforcement against illicit cigarettes, efforts to create a level playing field, reduce smoking rates, and increase revenue will ultimately fail.” A more prudent approach involves adhering to the government’s stated goal of revenue neutrality under GST 2.0—collecting the same tax without introducing new distortions. An MRP-based tax could produce short-term gains on paper but lead to long-term detriments, including reduced sales volumes, a shrinking legitimate tax base, and increased illicit trade. Rather than revising the GST framework for one product, policymakers should concentrate on enhancing enforcement against smuggling, maintaining a balanced GST-excise structure that provides predictability, and considering specific duties per stick to improve clarity and prevent manipulation.
Implementing GST on MRP for cigarettes may appear to be an easy solution, but the long-term ramifications—heightened illicit trade, farmer distress, and a weakened GST framework—significantly outweigh any advantages.