Cigarettes are consumed all over the universe and are considered to be the most sophisticated signifier of baccy ingestion. In most parts of the universe, they constitute an overpowering proportion of approximately 80 to 90 per cent of the entire baccy ingestion. In India, nevertheless, they account for hardly a sixth of entire baccy ingestion. It is non that smoking is non popular in India. Indeed, the proportion of baccy smoked is invariably lifting and presently stands at 71 per cent of the baccy consumed in the state. Within the smoke section, nevertheless, it is bidis which have been turning at the disbursal of coffin nails both comparatively and perfectly. Table 1 shows the tendencies in the baccy ingestion in India over the period 1971-94.
Tobacco Consumption in India
Tobacco Used In
417SOURCE: Tobacco Excise Tariff Committee and Indian Tobacco Statistics
Such a tendency in baccy ingestion has several deductions for the authorities ‘s excise policy in this sector. The chief aim of the authorities ‘s excise policy seems to be gross coevals. This is because it is one of those merchandises where authorities is neither interested in increasing the domestic ingestion nor appears to be earnestly interested in controling ingestion. As a affair of fact, baccy used for smoke has been increasing in India at the one-year compound rate of 2.8 per cent over a period 1971-2 to 1993-94 ( See Table 1 ) .
After the backdown of responsibility on foliage baccy in 1979, the authorities had small option but to raise responsibility on concluding merchandises to bridge the gross spread. The nature of the concluding merchandises in Indian baccy sector restricts the authorities ‘s options. Cigarettes in India are produced merely by a few companies in the large-scale registered fabrication sector which makes it really cost effectual to roll up excise. Bidis, on the contrary, are produced in the informal sector on a little graduated table by a really big figure of units widely dispersed geographically. Furthermore, since they are handmade, they are non unvarying. All this makes bidis highly cost inefficient to roll up excise. It does non intend that the authorities can non impose revenue enhancements on bidis. Rather, it is hard to raise net gross by making so. Most of the baccy merchandises in the non-smoking section portion such characteristics with bidis. Therefore, coffin nails were considered the most relevant revenue enhancement base in the baccy sector. Table 2 shows that coffin nails are virtually the lone tax-base in the Indian baccy sector.
Tax-Base of the Indian Tobacco Sector
( Rs. Crores )
Cigarettes as a per centum in
Beginning: Tobacco Excise Tariff Committee and Budget Documents.
The tabular array clearly shows that the tax-base in the baccy sector is shriveling quickly over clip. The decreasing tax-base is being burdened with larger and larger part of excise gross in both absolute and comparative footings. This implies a really high incidence of revenue enhancement which gives rise to the equity issue. The inequality of revenue enhancement incidence in the baccy sector is significantly higher than all possible steps of income inequality in the state. Merely 12 per cent of the baccy users who are cigarette tobacco users contribute every bit much as 87 per cent of the excise gross from the sector, the staying 88 per cent of the baccy users contribute only13 per cent. In footings of the excise gross per kg of baccy used, cigarettes output Rs. 415 whereas bidis output merely Rs. 19. Such a high incidence of revenue enhancement and inequality is likely to promote revenue enhancement equivocation and smuggling that would travel against the involvement of the authorities, industry, and the consumers likewise. It needs rectification Oklahoman than subsequently sing the potency for growing and exports by the Indian coffin nail industry.
At present when the Finance Ministry is seting accent on enlargement of tax-base instead the increasing revenue enhancement rates in order to accomplish growing in revenue enhancement gross, the issue of a quickly shriveling baccy tax-base in the baccy sector can non be ignored. This state of affairs has chiefly arisen because the Indian authorities chose the easier option of about continuously raising excise responsibility in order to earn increased excise gross from coffin nails. Presently the excise on coffin nails has crossed the degree of 150 per centum of the monetary value cyberspace of excise. It is clip to oppugn whether coffin nails in India are overtaxed. If they are, any farther addition in the excise rate would take to worsen instead than a rise in the excise gross.
The basic premise behind following the policy of steep and uninterrupted addition in excise responsibility on coffin nails is that the demand for coffin nail is monetary value inelastic. This implies that in response to increase in excise responsibility and hence in monetary value, the demand for coffin nails would non fall proportionally and hence give higher revenue enhancement gross. However, whether coffin nails in India are monetary value inelastic or non is an empirical inquiry which can be scientifically addressed.
There are two ways of gauging the snap of demand for coffin nails in India: ( 1 ) By taking one-year alterations in the monetary value and measure demanded of coffin nails over the recent period and use the Arc Elasticity expression to cipher the snap of demand relevant for the current period and, ( 2 ) Estimating the demand map for coffin nails utilizing long-run clip series informations and obtaining an estimation of the snap of demand for the current period based on the arrested development equation. Both the methods are used here so that the most conservative estimations of the monetary value snap of demand for coffin nails in India can be obtained.
The advantages of the Arc Elasticity method are:
It requires one-year norms over short periods of clip and hence efficaciously uses the most recent informations, capturing the current tendencies in the monetary value responsivene3ss of the trade good.
Since appraisal is over a short period of clip, the long-run influences such as alterations in consumer gustatory sensation and penchants in favor of or against the trade good in inquiry are non likely to play a important function.
In comparing to the alternate Point Elasticity step the Arc Elasticity step, ever gives a lower ( and therefore more conservative ) estimation at higher monetary value and lower measure consumed. In the Indian coffin nail industry, the volumes have been systematically worsening since 1991-2.
The chief restriction of the Arc Elasticity step is that it is a direct method, non capable of dividing the influence of some of import factors such as monetary value of a close replacement ( bidis ) or existent income of the consumers. However, the influence of some other variables such as seasonal fluctuations, population growing and general rising prices on the demand for the trade good can be neutralized by mensurating the volume of coffin nails as a monthly norm on a per capita footing, and the monetary value of coffin nails as a existent monetary value which I obtained by deflating the nominal monetary value by the consumer monetary value index.
The Arc Elasticity expression utilizes the construct of mean per centum alterations in the demand and monetary value over the interval, i.e. ,
Arc Elasticity = X2 – Ten 1 ten P2 + P1
X2 + X1 P2 – P1
Where, ( P2, X2 ) and ( P1, X1 ) are the ascertained values of monetary value ( P ) and volume ( X ) for the twelvemonth 2 and 1 severally. Using this expression, and the information from Table3, estimations of the monetary value snap of demand for coffin nails are obtained for back-to-back periods from 1991-2.
Monthly Average Consumption and Price/1000 Cigarettes
( million cigs. )
( in sticks )
Monetary value in Rs.
Real Monetary value
* Excluding bush leagues.
** Based on the period March to Aug. 1994
Beginning: I. For volume and consumer monetary value of coffin nails: Cigarette industry beginnings in India.
two. CPI is for urban non-manual workers, obtained from CMIE, Aug. 1994.
Arc Elasticity of Demand for
1991-2 to 1992-3
… … … … … …
1991-2 to 1993-4
1991-2 to 1994-5
These estimations imply that a one per cent decrease in the monetary value of coffin nail would ensue in minimal addition of two per cent in the entire ingestion of coffin nails. In other words demand for coffin nails in India is monetary value elastic ( possibly extremely monetary value rubber band ) . The statistical grounds does non back up the belief that the demand for coffin nails is monetary value elastic in India. Thus estimation for India may be compared with that obtained for the US by the Nobel laureate Gary Becker and his co-workers ( American Economic Review, June 1994 ) who found that the monetary value snap of demand for coffin nails in the US is ( – ) 0.4 in the short tally and ( – ) 0.75 in the long-run.
It may be noted here that in malice of the reasonably inelastic demand for coffin nails, in the US both in the short-term and long-term, the US Federal rate of excise on coffin nails is less than 12 per centum ( entire revenue enhancement being 35 per centum ) of consumer battalion monetary value as compared to an norm of about 60 per cent in India. There was a proposal by some Congressmans in the US that Federal revenue enhancement rate should be raised well from the prudent rate of 24 cents to $ 1.24 per battalion of coffin nails. Professor Gary Becker had warned against such a move controversy that it would amount to unnecessarily high revenue enhancement. Harmonizing to his estimations, the revenue enhancement gross from coffin nails would be maximized when the revenue enhancement rate increased from 24 to 95 cents. Thereafter, the revenue enhancement gross would fall as the revenue enhancement rate was increased farther. It is learnt that the US Government has since deferred the proposal, taking awareness of Professor Becker ‘s warning.
Professor Gary Becker ‘s statement is based on a well known proposition in monetary value theory that monetary value snap increases as the monetary value rises. Therefore, ceteris paribus, there is ever an optimum rate of excise responsibility that maximizes the excise gross from the trade good. ( See Fig. 1 ) . Any higher rate of revenue enhancement would do it an overtaxed trade good aching the involvement of everybody involved in it.
Que. 1. When is a trade good considered overtaxed?
Que. 2. Why is the demand for coffin nails in India elastic and inelastic in the US?
Que.3. What should be the optimum revenue enhancement rate on coffin nails in India ( refer figure 1 ) ?
Que. 4. As the Finance Minister of India, how will you impose the revenue enhancements on trade goods and what factors would you take into consideration?