As the planning exercises for Union Budget 2017 begin, there is speculation that the finance minister will propose higher taxes on sugary beverages (soft drinks), tobacco, alcohol and luxury cars. The first three are usually bracketed as sin taxes, though there is no reason to regard addiction to luxury cars as a benign behaviour. This follows close on the heels of a WHO recommendation to raise tax-linked price of sugary drinks by 20 per cent, to reduce the risk of obesity and diabetes.
The main reason why budget-makers may raise these taxes is to generate larger revenues. Higher ‘sin’ taxes also serve a public health purpose. When prices of tobacco, alcohol and sugary drinks rise, their consumption is reduced. The addictive nature of these substances does not permit perfect ‘elasticity’ of demand, where the rate of rise of price is reflected in the rate of decline in consumption. Nevertheless, there is an overall reduction in consumption, particularly among persons with lower disposable income.
There is now proof that higher ‘sin’ taxes work. Higher tobacco taxes have been shown to decrease smoking rates in diverse economies such as France and South Africa. A 10 per cent tax on sugary drinks has reduced their consumption in Mexico, where overweight and obesity had reached record levels. Even Britain, which is wedded to free market economy, recently raised taxes on sugary drinks. Other countries are likely to follow.
India too needs to consider raising ‘sin’ taxes to levels they will have impact. The finance minister had earlier signalled his interest by imposing a 5 per cent tax on sugary drinks. That should be raised to 20 per cent in accordance with WHO.
Similarly, tobacco taxes too need to be increased. There is a reluctance on part of policymakers to tax ‘beedis’. Their defence revolves around the employment offered to a large number of people, especially women. They ignore that beedi is the most commonly smoked form in our country and provides only seasonal employment that does not deliver the women from poverty. They also suffer health effects of physical contact with tobacco.
As India will be hosting Conference of Parties who represent 180 countries committed to implementing the Framework Convention in Tobacco Control- in November, political leaders must accept the need for higher tobacco taxes. Their commitment to the poor should be reflected in saving them from the diseases caused by tobacco and the economic ruination that it inflicts on a family when it kills or seriously disables a wage earner.
There is yet another benefit that can flow from sin taxes.
If the revenue pool expands, allocations to health can increase. This is urgently needed, because India’s public financing of health—around 1-1.2 per cent of GDP—is among the lowest in the world. This results in a high out-of-pocket spending for individuals, with over 60 per cent of total health expenditure coming from personal finances. This results in over 50 million Indians being pushed into poverty each year, due to unaffordable healthcare.
Since there is no assurance that an expanded revenue pool would result in an increased allocation to health, should ‘sin taxes’ be wholly or partially earmarked for health? Generally, economists and finance ministers are not in favour of such earmarking, as it reduces their ability to exercise allocative efficiencies and ensure balance. It is also not a good idea for health, in the long run. Finance ministers may cut regular allocations to health, because there is an earmarked component. Health ministries will then become dependent on ‘sin’ taxes, requiring a continued level of consumption. That creates a perverse incentive for ministries to go slow on non-tax measures for control of tobacco, alcohol and unhealthy foods.
In the short and medium term, however, the Philippines model can be followed. It recently increased tobacco taxes and earmarked 85 per cent of the extra revenue to health. Fresh thoughts for Indian Budget 2017?
President, Public Health Foundation of India