India: The Tax Treatment of Bidis Emil M. Sunley Presentation at the World Bank April 2, 2008

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

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

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

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

Handmade Bidis Account for Over 98% of the Bidi Market They are taxed at only half the rate of machine-made bidis Percent of Bidi Market

The Case for Increasing Excise Taxes on Bidis Bidis are under-taxed compared to cigarettes –Currently taxed at <1% to <10% 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 if they reduce consumption –There are better ways to help the poor than providing cheap tobacco products

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

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

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.

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

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

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

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

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

Indian Budget The low excise rates on nonfilter cigarettes eliminated –The rate on micro non-filters increased from Rs 168 to Rs 810 per 1,000 sticks –The rate on regular non-filters increased from Rs 546 to Rs 1,323 per 1,000 sticks No increase in the excise rates on bidis