India’s new GST rates excerberate tax differences among tobacco products, a contravention of WHO FCTC guideline

By reducing the GST rate for bidis from 28% to 18% while increasing the GST rate for other tobacco products to 40%, the new GST rates, labelled as “landmark tax framework” and “next-generation GST reforms”, are a public health disaster

When the recently announced changes to the Goods and Services Tax (GST) rates for tobacco products take effect after a couple of months, bidis will be levied only 18% GST, down from the current 28%. Not only has the GST rate of bidis been reduced to 18%, GST for bidi wrapper leaves (tendu), which form a major component of bidis, has also been reduced from 18% to 5%. If dropping the GST rate for bidi wrapper leaves (tendu) by itself will result in reducing the cost of bidis, slashing the GST rate for bidis from 28% to 18% will make them cheaper and even more affordable.

Reducing the GST rate for bidis and tendu leaves is in direct contravention of the 2003 WHO Framework Convention on Tobacco Control (FCTC), to which India is a signatory. Article 6 of FCTC — Price and tax measures to reduce the demand for tobacco — is explicit in stating that it is particularly important for tobacco taxes to be “increased” to “protect young people from initiating or continuing tobacco consumption”. The logic is that higher taxes on tobacco products will effectively increase real prices, which in turn will lower tobacco consumption and prevalence, thus save more lives and improve the health of the population.

“Effective taxes on tobacco products that lead to higher real consumer prices (inflation-adjusted) are desirable because they lower consumption and prevalence, and thereby in turn reduce mortality and morbidity and improve the health of the population,” Article 6 of FCTC says. Incidentally, reducing the GST rates for both bidis and tendu leaves are the not the only damaging “landmark tax framework” that has been inflicted on tobacco products.

Huge tax differences for different tobacco products

In contravention to the FCTC guidelines, the GST Council’s “next-generation GST reforms” has unwittingly ended up creating huge differential taxes for different tobacco products — increasing the GST rates from 28% to 40% for cigarettes and chewing tobacco, while reducing the GST rate for bidis to 18%. Since June 2017 when GST was introduced, all tobacco products — cigarettes, bidis and smokeless tobacco — attracted the same and the highest tax rate of 28%. While there is already a preferential tax system in place for bidis even before the present GST revision recommendations, introducing different GST rates for bidis and other tobacco products has exacerbated the tax differences.

“Until now, a uniform GST of 28% was applied across all tobacco products. The new GST Council recommendation disrupts this basic parity, going against WHO-FCTC and international best practice. It is indeed surprising to see this shift after more than eight years of maintaining a uniform GST rate on all tobacco products since the inception of GST in 2017,” Dr. Rijo John, a health economist and professor at the Rajagiri College of Social Sciences, Kochi, Kerala says in an email.

Other non-uniform taxes

Introducing different GST rates is not the only way the GST Council has created huge differences in taxes for tobacco products. Since 2017, in addition to 28% GST for cigarettes, a Compensation Cess to compensate States for potential revenue losses under GST on the retail price for cigarettes was also levied, making the total indirect tax burden for cigarettes approximately 53%. In contrast, currently no Compensation Cess is levied for bidis, which will be the case even when the revised GST rates kick in for all tobacco products after a few months. As per the GST Council, the current 28% GST for all tobacco products will continue till loan and interest payment obligations under the compensation cess account are completely discharged, which is expected to be in a couple of months.

Besides Compensation Cess, National Calamity Contingent Duty (NCCD) is levied for 1,000 sticks of cigarettes and bidis. NCCD varies from Rs.200 per 1,000 sticks for non-filter cigarettes less than 65 mm length to Rs.735 per 1,000 sticks for filter cigarettes 75-88 mm length. But in the case of bidis, the NCCD levies per 1,000 sticks is a meagre Rs.1.02.

Similarly, non-uniform excise tax is levied for cigarettes and bidis. If excise tax of Rs.5-10 per 1,000 sticks is levied for cigarettes, excise tax for bidis is just Rs.0.05 per 1,000 sticks.

How the new GST rates will change retail prices

“The price increase will be quite less for cigarettes with a new 40% GST while the price decline will be more significant for bidis with a reduction in GST to 18%, assuming all other taxes remain as is. This is because at the moment, GST alone takes up close to 100% of all taxes applied on bidis (there is a very small amount of NCCD and excise tax) while GST itself takes up roughly only 50% of taxes applied on cigarettes,” says Dr. John in the email.

In an Opinion piece published in The Hindu on December 17, 2024, Dr. John noted: “Even at 28% GST for all tobacco products, the tax burden on tobacco products was uneven. GST taxes account for only 22% of the retail price of bidis, while it accounts for 49.5% for cigarettes and 64% for smokeless tobacco,” he said.

The revised GST rates for tobacco products will come into effect in the next couple of months. “I believe, at that time, the compensation cess will be replaced with something else so that the total tax including the revised GST to 40% will remain revenue neutral for all tobacco products, except bidis whose tax burden will clearly go down as bidis currently have no compensation cess,” Dr. John says in the email.

“There is absolutely no public health rationale for imposing a lower GST on bidis, and the government has not officially provided one. A common explanation offered in the past is that bidis were not classified as a ‘sin good’, unlike other tobacco products. This was also why the compensation cess was never applied to bidis, though it was levied on all other tobacco products. It now seems that the same flawed logic has been extended, further skewing the tax structure in favour of bidis.”

Non-uniform taxes violate FCTC

Coming to the issue of different tax rates for bidis and other tobacco products, the FCTC guidelines for implementation of the convention require all member States who are signatories to levy uniform taxes for all tobacco products.

“All tobacco products should be taxed in a comparable way as appropriate, in particular where the risk of substitution exists,” is the recommendation for implementing Article 6 of the FCTC convention. Levying uniform taxes for all tobacco products is to ensure that the incentive to switch to cheaper products in the same category or to cheaper tobacco product categories, which is smoked tobacco products in this case, is minimised. But with effective price for bidis set to reduce with respect to cigarettes, it is very likely that people may switch from cigarettes to bidis. The possibility of young people who begin to use tobacco products starting to smoke bidis for the simple reason of bidid being cheaper cannot be dismissed.

“The tax burden on all tobacco products should be regularly reviewed and, if necessary, increased and, where appropriate, be similar,” say the FCTC recommendation for implementing Article 6.

Impact of uniform 28% GST

“Since the inception of the GST regime eight years ago, bidis were rightly placed on par with other tobacco products under the highest GST slab of 28%,” says Dr. John. Despite the uneven retail price difference between bidis, cigarettes and smokeless tobacco, the uniform GST rate of 28% on all tobacco products resulted in “reductions in smokeless tobacco and bidi use prevalence by 0.023 and 0.008 percentage points, respectively”, which though small had a statistically significant effect. There was no notable impact on cigarettes, though, Dr. John wrote in a June 2025 paper in Tobacco Control.

Bidis have been more easily affordable than cigarettes, which required adequate increase in taxes on bidis to make it less affordable. Also, as per the 2016 Global Adult Tobacco Survey, bidis outsold cigarettes 4.3:1. Now, reducing the GST rate for bidi has only increased the difference in the retail price of bidis and cigarettes.

Economic costs of tobacco use

Contrary to general notion, bidis, and not cigarettes, are the most commonly smoked tobacco product in India, and as a result bidis account for the greatest share of the tobacco-attributable disease burden and deaths. According to the WHO, the total economic costs attributed to tobacco use from all diseases in India in the year 2017-2018 for persons aged over 35 years amounted to Rs.1,77,341 crore (Rs.1,773.4 billion), which is about 1% of GDP.

An August 2020 paper in the journal Nicotine & Tobacco Research highlight how the excise tax revenue is far less than the economic cost of tobacco use —  while the economic costs of tobacco use were about 1.04% of India’s GDP, the excise tax revenue from tobacco in 2016-2017 was only 12.2% of its economic costs. The high economic cost of tobacco use comes even after the prevalence of tobacco use dropped by six percentage points from 34.6% in 2009-2010 to 28.6%, which is nearly 267 million adults above 15 years age.

“The economic burden from tobacco constitutes more than 1% of India’s GDP, and the direct health expenditures on treating tobacco-related diseases alone accounts for 5.3% of the total private and public health expenditures in India in a year. For every Rs.100 that is received as excise taxes from tobacco products, Rs.816 of costs is imposed on society through its consumption,” Dr. John and others wrote in the August 2020 paper.