Taxation of Tobacco in India

7/30/2019 Taxation of Tobacco in India

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ECONOMICSTaxation of Tobacco in India

SECTION C- GROUP NO.6

GROUP MEMBERS

Aditya Jain - 13A1HP046

Adwait Khare - 13A1HP075

Darshan Ganatra - 13A2HP009

Pranshu Sharma - 13A1HP017

Sarang Sorte - 13A3HP013

Sushant Arora - 13A3HP044

Tushar Kango - 13A1HP069

Vikrant Gosain - 13A3HP047


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Question #1

Interpret table 3.1 and 3.5. Evaluate the future prospects of ITCs tobacco products in the rural

areas based on the numbers in these two tables. Write a brief report explaining ITCs rural

market potential based on the numbers in the case.

The future prospects and market potential of ITCs tobacco products are as under:

#1 Unfiltered cigarettes

The taxes on unfiltered cigarettes has exponentially increased by 411.87 % for length


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Question #2

Based on the price elasticity estimates in table 4.2, explain own and cross price elasticities for the

tobacco products (bidi, cigarette and leaf tobacco). Assume a hike of 5% on bidis and 15% on

cigarettes, how would the young consumer react?

Based on the price elasticity estimates of table 4.2, if the price of bidi increases by 5% the

demand will decrease by 4.6% thus inferring that bidi is relatively elastic in nature.

Let us now consider the price elasticity of cigarette with respect to youth, it is relatively elastic in

nature. As the price of cigarettes increases the demand among youth will be decreased relatively.

So if the price of cigarettes increase by 15 % the demand will decrease by 5.22 %

The price elasticity of leaf tobacco is -0.833 thus assuming that if there is a 10 % hike in its price

then the demand will be reduced by 8.33 %. Thus price elasticity of leaf tobacco is perfectly

elastic in nature.

A 5 % hike in bidis price will result in 0.3 % decrease in demand of cigarettes and 0.001 %

decrease in demand of leaf tobacco, thus suggesting that the cross elasticity is negative in nature.

A 15 % hike in the price of cigarette results in 3 % decrease in demand of bidi but a 0.03 %

increase in demand of tobacco leaf. So the cross elasticity of cigarette and bidi is negative in

nature and cross elasticity of cigarette and tobacco leaf is relatively positive in nature.

Bidi Cigarette Leaf Tobacco

5% Increase in price of Bidi 0.3% Decrease in Demand 0.001% Decrease in Demand

3% decrease in demand of

Bidi

15%Increase in Price of

Cigarette

0.03% Increase in Demand of

Tobacco leaf


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Young consumers will not react to the increase in price as we see that the own elasticity of these

products is relatively inelastic.

Question #3

Raising taxes on tobacco products saves lives and increases government revenue. What are the

pros and cons of such a view point?

Health Benefits - Smoking taxation will result into lesser consumption and thereby lesser

instances of deaths and hospitalizations

Helps to Quit Smoking - Smoking taxation as a law will automatically reduce the number of

cigarettes that an individual smokes per day.

Saves Money - On the individual level, money is saved as lesser (or no) cigarettes are purchased.

This money may, in turn, be utilized for some other productive purposes.

Decreases Pollution and Fire Hazards

The smoke that is exhaled by an individual while smoking contains harmful substances that

pollute the air around.

Fire is a risk when more and more people smoke because we are surrounded by innumerable

flammable materials

The Cons

The following are some of the cons of the taxation:

Economic Impact

It is the hospitality industry that the smoking taxation seems to affect the most. People who

smoke, are often major patrons of cafs, bars, and restaurants, and the number of these patrons

tends to diminish when a smoking taxation is imposed.

The reduction in the number of patrons would earn them lesser profits, thus leading to financial

difficulties. Moreover, if these difficulties go on increasing by the day, some of the businesses

might also consider permanent closure. In such cases, the risk of more and more employees losing their jobs is elevated. The job

market would, in turn, generate much lesser jobs, leading to a rise in unemployment.

The government earns a lot of revenue through the sale of tobacco and cigarettes. The taxation

results in a major drop in this revenue.


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Personal Right

Nonsmokers, in order to avoid inhaling the smoke, may prevent themselves from going to

places that allow smoking.

High taxing only smoking as a potential health hazard is a little absurd as there are some other

substances as well (alcohol), which pose similar health hazards.

Difficult to Implement

Though a smoking taxation may seem like a brilliant idea to control the potential dangers, it is

not always easy to implement at all places.

Question #4

Public health vs Increased revenues. What are the opportunity costs of this trade off?

The term opportunity cost refers to a situation that involves losing one quality or aspect of

something in return for gaining another quality or aspect. A trade off would refer to the most

preferred alternative given up by fully weighing both the upside and downside of a particular

choice. It involves a sacrifice that must be made to obtain a certain product, rather than other

products that can be made using the same required resources.

In context of public health vs increased revenues for the tobacco products, the opportunity costs

for choosing public health could be the compromise on revenue. However, studies show that,

Tobacco tax is a highly reliable and predictable source of revenue. While developed countries

often have several avenues of generating revenue, low income countries often receive little

revenue from taxes and may seek to increase a 'sin tax' mainly to raise much needed cash. In

such cases, the reduction in tobacco consumption may be a positive by-product.

It is relevant examine the impact of tobacco use on the standard of living of low income

households and the second-hand effects on the family members of tobacco users, apart from the

detrimental health effects. Tobacco users, especially from lower socio-economic strata invest

scarce household expenditures on tobacco, rather than on essential expenditures.

Studies have also found that tobacco expenditures have high opportunity costs and reduce the

nutritional status of low income households by reducing expenditures on food in lieu of tobacco

products

Documents

Taxation of Tobacco in India