India’s most populous state of Uttar Pradesh has decided to hike VAT on cigarettes and tobacco products. On cigarettes, it has been raised from 25% to 40% and on other tobacco products, it has been raised from 30% to 40%. If that was not enough, the government has also decided to ban the sale of loose cigarettes in open markets. The government has come out with a statement justifying its move. As per the statement, since smoking is known to cause severe health problems, increasing taxes will make tobacco products costlier and put it further out of reach of poor people. Though it might seem like an anti-poor move, it will at least act as a deterrent for buyers and hence, is expected to have indirect benefits on a buyer’s health.
But government’s claim of taking this step only to discourage sale of tobacco products is not complete. To put it simply, it’s not the only reason why government has taken this step. Tobacco companies have long been a big source of revenue for state governments. This move is being seen by many experts, as a step to further milk these cash cows.
A part of the incremental revenues from VAT hike will be set off against the drop in sales, caused by ban on sale of loose cigarettes. But even then, it is expected that the revenues will increase by more than Rs 200 Crs.
Obviously, this move is not a good one for tobacco companies. At one hand the increase in VAT will reduce the margins for them. On other end, ban on sale of loose cigarettes is expected to reduce the overall sales of the cigarettes. This is because many poor people will now move to cheaper alternatives like bidi, etc. It will be interesting to see how tobacco companies will deal with this hike and whether they will launch smaller and cheaper variants of their products or not.