What is sin tax? What is it imposed on?

Ever wondered why your cigarettes or alcoholic drinks cost so much more than their production cost? That’s because a major portion of their price comprises tax that is levied at higher rates than your other everyday products. This is sin tax.

Sin tax is mainly levied for public health purposes to discourage the consumption of harmful products by making them unaffordable. 

India also imposes a higher tax on sugary carbonated beverages. Under the current GST structure, some of the sin goods that attract an additional cess include tobacco products, aerated drinks and pan masala. 

India has about 270 million people aged 15 and above who consume some form of tobacco. Tobacco is a major risk factor for several chronic diseases, including cancer. According to the World Health Organisation, it accounts for 1.35 million deaths in India every year. 

Tobacco products fall in the highest GST slab of 28% as it attracts the heavy cess. The cess is paid by the centre to states to compensate for any loss of revenue arising on account of implementation of GST.

There is a cess of 65% on unmanufactured tobacco bearing a brand name while it is 160% for scented zarda. Pan masala containing gutkha is subject to a cess of 204%.

The current cess on cigarettes is 5% plus up to Rs 4,170 per 1,000 sticks. The total tax burden as a percentage of the final tax-inclusive retail price is about 52.7% for cigarettes, 22% for bidis and 63.8% for smokeless tobacco.

However, this is still much lower than the World Health Organization (WHO) recommended tax burden of at least 75% of the retail price for all tobacco products. 

In October, the government set up a nine-member panel to prepare a comprehensive tax policy proposal covering all tobacco products from a public health perspective.

Alcohol, which is outside the ambit of GST, is taxed separately by the states. High taxes on alcohol is also a major revenue source for states.

An RBI report shows that during 2019-20, all the states and the UTs had budgeted a combined Rs 1,75,501.42 crore from state excise on liquor.

Winnings from online betting and gambling are taxed at a flat rate of 30% without accounting for the basic exemption limit of Rs 2.5 lakh under the income tax law.