Home / Money / Calculators /  De-jargoned: Sin tax

In the Union budget of 2014, finance minister Arun Jaitley increased the excise duty on cigarettes by 11-72% depending on the length. Similar increases were also introduced on cigars, cheroots and cigarillos. An additional 5% excise duty on fizzy drinks containing sugar was also announced. These specific increases in duty on certain items or activities are termed as ‘sin tax’.

What is it?

A sin tax is usually restrictive in nature and is levied on products such as cigarettes, tobacco and soft drinks, or activities such as gambling, which are deemed to be undesirable by the society. Around the world, many countries levy such a tax to finance particular projects. For instance, in 2014, Singapore introduced a steep tax hike on tobacco, alcohol and gambling to fund healthcare subsidy for a large chunk of its ageing population. Some countries, however, make it completely illegal to use such products. For example, consumption of alcohol is banned in many countries with a Muslim majority. Bhutan does not allow sale or smuggling of tobacco and a jail term of three years can be handed if a person is caught smoking publicly. Though foreign tourists can bring in a stipulated quantity of cigarettes or tobacco, a heavy tax needs to be paid. In India, the erstwhile Planning Commission had mooted the idea of sin tax on tobacco products and alcohol in 2012 in the 12th Five-year Plan period to fund public healthcare.

Why is it levied?

Such taxes are levied with a view that making these products or activities expensive will deter people from using or indulging in them, though not making the use of such products illegal. It is also thought that such activities pose a burden on the society due to negative externalities. Minister of Science and Technology, Harsh Vardhan, who was earlier minister in charge for health endorsed higher taxes on cigarettes and tobacco products and said that he had seen the effect of such products on patients while treating them as a doctor.

According to a Public Health Foundation of India report, the economic cost of all tobacco-related diseases in India in 2011 for the age group of 35-69 years was around 1 trillion, approximately 1.16% of the gross domestic product.

Is it effective?

This form of tax is an important revenue source for many state governments as well as the central government. Such a tax is usually not criticized by the opposition given the political and moral compulsions. However, tobacco companies do lobby hard to reverse such hikes, which dent their revenues.

The other criticism that sin tax often faces is that consumers switch to cheaper products and intended objective of reducing consumption is not achieved. However, given the ill-effects of such products, such a tax may be justified if it is accompanied with other restrictive measures necessary to cut down consumption.

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