Have you ever questioned why your cigarettes or alcoholic beverages are so much more expensive than the cost of production? That’s because a large amount of their cost is made up of tax, which is paid at greater rates than on other products. This is called a sin tax. Traditional “sin” taxes have been imposed by governments around the world on items that have a harmful influence on people’s health.
In this article PhoenixTax- tax consultant in Tambaram, Chennai have given everything you need to know about Sin Tax in India.
Definition of Sin Tax
A sin tax is a tax imposed on a certain activity or good that is judged harmful to people or society, such as tobacco, alcohol, narcotics, and candy. These commodities typically yield a sizable amount of cash, which is why state governments choose to raise revenue through sin taxes. Excise or selective sales taxes are examples of sin taxes.
Both the federal and state governments levy sin taxes. Advocates for a sin tax think that the higher fees deter people from engaging in bad activities. Critics, on the other hand, despise the fact that these levies are regressive in nature and encourage people to seek out these things on the illicit market.
How does it work?
Cigarettes, booze, tobacco, and other items considered dangerous to people or society are generally subjected to sin taxes. Although sin taxes vary by country, they are normally levied at the time of production or when the service is rendered in the United States. Sin taxes are intended to raise the cost of products and services in order to reduce demand. They are a type of Pigovian tax applied to compensate society for the harm caused by harmful goods and services.
Sin or excise taxes, unlike sales taxes, apply specifically to specified services or items. Sales taxes, on the other hand, are charged on all purchases with a few exceptions. Furthermore, sales taxes are paid at the point of sale, whereas excise taxes are paid at the site of production.
The extra government money generated by sin taxes is usually utilised to pay the societal costs incurred as a result of the consumption of harmful items (e.g., increased spending on healthcare to treat the diseases caused by smoking). Furthermore, sin tax funds enable governments to conduct a variety of social projects (e.g., raise awareness of the consequences of smoking).
Sin taxes are typically levied as value-added taxes on a variety of products, including alcoholic beverages and cigarettes. Regressive taxes, such as sin taxes, are imposed on the poor. In other words, the taxes place more burden on the poorer parts of the population and less burden on the wealthier population.
Why is it required?
Sin taxes are designed to accomplish two goals.
1. Increase the cost of undesired commodities to the point where reasonable consumers are forced to abandon the habit.
2. Make corporations who make these products pay a higher tax rate, which might be used to fund other social programs. Sweden, for example, uses the extra tax revenue from gaming to assist persons with gambling addictions.
Tobacco, alcohol, and calorie consumption are all linked to an increased risk of heart attack, cancer, and obesity. According to studies, sin taxes have been effective in lowering hazardous product consumption, and states have reaped sufficient revenue from the extra tax.
In India, there is a sin tax.
India levies a high tax on sugar-carbonated beverages, and under the present GST system, certain sin items, such as cigarettes, pan-masala, and aerated beverages, are subject to an extra cess.
About 270 million individuals in India, aged 15 and up, use tobacco products in some manner. Tobacco use has become one of the leading causes of chronic diseases such as cancer. According to a WHO report, it causes 1.3 million fatalities in India each year. As a result, tobacco products fall under the highest tax bracket of 28 percent, as they are subject to a hefty cess. This tax is paid by the federal government to the state government to make up for revenue lost as a result of the adoption of the GST.
Unmanufactured tobacco with a brand name is subject to a 65 percent cess, while perfumed zarda is subject to a 160 percent cess. In addition, a 204 percent cess is placed on pan masala with guthka, and the current cigarette cess is 5% plus-up to Rs. 4170 for 1000 sticks. The entire tax burden is 52 percent for cigarettes, 22 percent for bidis, and 63 percent for smokeless tobacco as a percentage of the final tax-inclusive retail price.
India’s tax burden is still lower than the WHO’s suggested tax burden (at least 75 percent of the retail price for all tobacco products). The Indian government convened a team in October to produce a comprehensive tax policy proposal for tobacco products from the standpoint of public health.
Alcohol is taxed independently by states and is therefore exempt from the GST. Alcohol taxes are a significant source of revenue for states. According to a report by the Reserve Bank of India, all states and union territories have budgeted a total of Rs 1,75,501.42 crore in state excise on liquor for the fiscal year 2019-20.
Furthermore, profits from online betting and gaming are taxed at a rate of 30% without taking into account the income tax rule’s fundamental exemption limit of 2.5 lakhs.
Advantages of imposing Sin Tax
- People are discouraged from engaging in unhealthy behaviors when they are subjected to such levies. As a result, health problems related with the intake of unhealthy products are considerably reduced.
- It also aids the government in increasing its revenue. The government might use the money to subsidize healthcare.
- Sin taxes are also a more viable way for the government to raise revenue than other types of taxes, such as income taxes.
Disadvantages of imposing Sin Tax
- As previously stated, they are regressive taxes that discriminate against the poor by imposing a disproportionately high burden on them in comparison to the wealthy.
- The imposition of such tariffs may encourage criminal actions such as smuggling.
- These levies also have a mixed effect on consumer behavior, as some may reduce their consumption of dangerous products while others may not.
Budget 2022: Sin Tax
The Finance Minister has released her fourth budget for the fiscal year 2022-23. Normally, the stock market becomes nervous before the budget is presented because it fears an increase in the sin tax; however, cigarette manufacturing companies, particularly index heavyweight ITC, climbed up to 3.5 percent on the Bombay stock exchange this year as the government kept the taxation rates for sin products unchanged.
As a result, the concept of a sin tax has two goals. Of course, one goal is to discourage the consumption of dangerous products, while the other is to use the funds raised from these levies to fund social welfare programs. To bolster the government’s case, data from other nations that have implemented similar tariffs reveals that cigarette and soft drink consumption has decreased dramatically as a result of the new price.