How Budget 2025 can walk the tightrope of India's 'sins'

Budget 2025: India’s goal of becoming a developed nation by 2047 hinges on fostering a healthy working population. However, the country currently loses over 1% of its GDP to cigarette consumption, prompting the government to impose a “sin tax” on products detrimental to public health. Revenue from this tax is often directed toward welfare initiatives and used to discourage consumption by increasing product costs.While the GST Council holds the primary authority over taxation of tobacco products, the central government can also adjust the National Calamity Contingent Duty (NCCD) during the Union Budget. In 2023, the NCCD rates on tobacco products increased by 16%, but they remained unchanged in the 2024 Budget. Cigarettes and other tobacco products currently face the highest GST rate of 28%, along with compensation cess.

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Potential changes in Budget 2025

India, as a signatory of the WHO Framework Convention on Tobacco Control, is recommended to levy a minimum tax of 75% on the retail price of all tobacco products. However, current rates fall short of this benchmark, with cigarettes taxed at 52.7%, bidis at 22%, and chewing tobacco at 63.8%. Experts have repeatedly called for annual increases in tobacco taxes to curb consumption and boost revenue.

Tedros Adhanom Ghebreyesus and Helen Clark noted in BMJ Global Health that governments worldwide are missing cost-effective opportunities to improve public health by under-taxing tobacco products. In India, any increase in sin tax could potentially fund welfare schemes while contributing to the fiscal deficit target of 4.8% of GDP in 2024-2025.

“Currently, the highest rate of GST at 28% is levied on luxury goods and goods having negative impact on the society such as tobacco, cigarette, aerated drinks, alcohol, and gambling. Further, considering the sunset clause for compensation cess levied on such goods, it would be inevitable for the Government to consider measures to compensate for loss in revenue collection, such as increasing the tax rates. It is important to note that the decision to hike the rates or to create a new tax rate must be taken by the GST Council. The GST law enables the Government to levy tax rates up to 40%,” said Karthik Mani, Partner, Indirect Tax, BDO India. Read More: Will Budget 2025 green-light India’s climate finance taxonomy?

Impact on Industries

For companies like ITC, which derive over 80% of their net profit from cigarettes, higher taxes pose significant challenges. ITC highlighted in its annual report that steep taxation has led to increased consumption of illicit cigarettes and other lightly taxed tobacco products. Similarly, taxation on carbonated beverages has severely impacted the FMCG sector.

Nadia Chauhan, joint managing director of Parle Agro, attributed the company’s 87% decline in FY24 net profit to the 40% sin tax on sparkling drinks. “The decision to place fruit-based, non-caffeinated sparkling drinks in the sin tax category had a massive impact on the business,” she said. Industry body Indian Beverage Association (IBA) has urged a review of the 40% GST on carbonated beverages, citing its negative impact on innovation and growth in the sector.

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Sin tax and FMCG companies

Taxation on carbonated drinks has also significantly impacted the FMCG sector. Parle Agro, maker of Frooti and Appy Fizz, reported an 87% decline in net profit for FY24, attributing the loss to a 40% tax on sparkling beverages. “This forced us to reduce the serving size to consumers,” said Nadia Chauhan, Joint Managing Director, Parle Agro.

Industry bodies like the Indian Beverage Association (IBA) argue that the 40% tax on carbonated drinks hampers innovation and growth. The India Council for Research on International Economic Relations (ICRIER) noted that India’s carbonated beverages market, valued at $18.25 billion in 2022, lags behind other developing nations like Thailand and the Philippines.

“This report serves as a starting point for discussions on reviewing GST for carbonated products found in the highest tax slab with an additional imposition of sin tax,” Praveen Khandelwal, prominent representative of traders, said.