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India: The Tax Treatment of Bidis

India: The Tax Treatment of Bidis. Emil M. Sunley. Bidis. Indian market for smoking tobacco dominated by bidis Bidis account for 77% of the market for smoked tobacco About 10 bidis smoked for every cigarette. What are Bidis?. Bidis are shredded tobacco

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India: The Tax Treatment of Bidis

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  1. India:The Tax Treatment of Bidis Emil M. Sunley

  2. Bidis • Indian market for smoking tobacco dominated by bidis • Bidis account for 77% of the market for smoked tobacco • About 10 bidis smoked for every cigarette

  3. What are Bidis? • Bidis are shredded tobacco • Tobacco is sun-dried, hand-rolled in leaf (tendu) and secured with string • Traditionally non-filtered and non-flavored • Some bidis are now made with filters and flavorings

  4. Bidi Production • 3 constituencies involved • Tendu leaf plucker • Bidi tobacco farmer • Bidi manufacturer • Manufacturing steps • Procurement of raw material • Bidi rolling • Sorting and roasting • Packing

  5. Bidi Manufacturing Process Tobacco Tendu Leaves Raw Materials Cultivated and sun- dried by the farmer Plucked and sun-dried by indigenous tribal people Tobacco Processor / Blender Government / Department of Forestry Tender Process Bidi Manufacturer’s Representative / Agent Bidi Manufacturer

  6. Bidi Manufacturing Process Bidi Manufacturer Tobacco, tendu leaves and thread Rolled Bidis Sorting and roasting Rolling Process Rolling Contractor Packaging Tobacco, tendu leaves and thread Rolled Bidis Rollers Rollers Rollers

  7. Bidi Manufacturing Process Packaging Wholesaler Wholesaler Wholesaler Retail Retail Retail Retail Retail Retail Retail Retail Retail

  8. Per Stick, Bidis Are as Dangerous as Cigarettes • Although bidis contain only about 1/5 the amount of tobacco in regular cigarettes, they contain 2-3x more tar and nicotine • Bidi smokers consume on average twice as many sticks per day as cigarette smokers • Mortality rate among bidi smokers 20% higher than among cigarette smokers

  9. The Case for Increasing Excise Taxes on Bidis • Bidis are under-taxed compared to cigarettes • Currently taxed at <10% to <1% of the rates levied on cigarettes • In the past, tax rate on bidis kept low to “protect the poor” • However, poor bidi smokers would have better health and financial stability if they reduce consumption • There are better ways to help the poor than providing cheap tobacco products

  10. Handmade Bidis Account for Over 98% of the Bidi Market…But are taxed at only half the rate ofmachine-made bidis Percent of Bidi Market

  11. Excise Duty on Bidis is Only 8%of Excise Duty on Micro (</=60mm)Non-Filter CigarettesAnd both duties have barely kept pace with inflation * Handmade bidis only, which account for 98% of the bidi market.

  12. Bidi Excise Revenues Remain Flat While Cigarette Excise Revenues Increase

  13. >10 Bidis are Smoked for Every Cigarette…But Bidis Account for <6% of Combined Excise Tax Revenues (2006/07)

  14. Excise Tax Burden for Bidis is Much Lower than for All Types of Manufactured Cigarettes Cigarettes Note: Prices are for most common brand of cigarettes, and for handmade bidis.

  15. Excise Tax on Bidis (Rs 14 per 1,000) is <1% of Tax on Some Cigarettes Cigarettes * Handmade bidis only, which account for 98% of the bidi market.

  16. Numbers of Bidis on which Taxes Are Paid Are Decreasing

  17. Between 52 and 70% of All Bidis Consumed Are Not Tax-Paid

  18. Micro Non-Filter Cigarette Consumption Increased when Tax Rate Cut, then Decreased When Tax Rate Increased Likely Due to Shift to Bidis Taxed at Lower Rates

  19. Recommendations to Rationalize Tax System • Eliminate distinction between handmade and machine-made bidis • Higher excise on machine-made bidis favors handmade process (98% of bidis are handmade) • Negligible revenue effect in short-term • Over time, would lead to greater use of machines to produce bidis • Impact: Bidi industry would employ fewer people; those employed would be paid more Bidi manufacturing would be less fragmented, making it easier to collect excise duties

  20. Recommendations to Rationalize Tax System (cont.) • Eliminate small producer exemption • Or alternatively limit it to truly small companies and allow inspections • Reduce tax evasion • Prohibit sale of unbranded bidis • Require reporting to Excise Department of all sales to and by manufacturers or their agents • Increase excise rate on bidis • From current Rs 14 per 1,000 sticks to at least Rs 168 per 1,000 sticks • Same rate as micro non-filter cigarettes

  21. Reform of the National Goods and Services Tax (GST) • Treat excisable goods as other goods, subject to VAT (not exempting bidis) • Set a single specific excise rate for all cigarettes • Initially set higher than the excise rate for regular filter cigarettes • Over several years, increase excise rate on bidis to single rate for all cigarettes

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