The Punjab Government has withdrawn sin tax on cigarettes that it
had levied in the 2013-2014 budget. The idea behind imposing the sin tax was to
fund the treatment of poor cancer patients and set up drug de-addiction centres
with the revenue collected. However, the result has been a the growing menace
of smuggling of cigarettes from neighbouring states, coupled with a decrease in
sale of cigarettes in the state resulting in decreased revenues. This is
because no other states in North India have imposed sin tax on cigarettes other
than Uttar Pradesh. But is the government justified in acting disappointed at
the outcome or should it really have known better? After all sin tax does have
a reputation for coming with inevitable collateral damage.
Is sin tax by very nature defective? To examine this we must examine the moral, administrative, medical and financial arguments for and against sin tax.
Is sin tax by very nature defective? To examine this we must examine the moral, administrative, medical and financial arguments for and against sin tax.
Sin tax is a kind of sumptuary tax, i.e. a tax specifically levied
to reduce transactions involving something that society considers undesirable.
Common targets are alcohol, tobacco, gambling, soft drinks, fast food, candies etc. The revenue generated by sin
tax is usually used for special projects to benefit the 'sinners' and other members of society. For instance Sweden uses its gambling
sin tax to help people with gambling problems while some American counties use such
taxes to build more sports facilities for residents.
The rough idea behind sin tax is to prevent certain behaviours. Raise the cost of certain products to make people stop using them or at least use less of them. After all most smokers and alcoholics are in a constant
struggle to quit and making the ‘sinful’ behaviour financially painful may be
the ultimate push they need to stick to their decision of quitting.
Taking the medico-economic perspective, it is argued that consumers of tobacco and alcohol cause a greater financial burden on society by forcing others to pay for medical treatment of conditions stemming from such consumption, especially in many first world countries where government funds health-care costs. They should be taxed extra to pay for the cost of their treatment. All these arguments seem valid but the dynamics of sin tax in real life are usually very different.
Sin tax has had a bad reputation ever since it was first
implemented. It has historically triggered rampant smuggling and black markets,
especially when it creates a large price difference in neighbouring
jurisdictions. It is also a regressive tax in nature which means that it is
imposed in such a manner that the tax rate decreases as the amount to be taxed
decreases. A regressive tax imposes greater burden on the poor, relative to
their resources, than on the rich. So if a man earning 10,000 rupees a month has
to shell out 1000 rupees for monthly alcohol rather than 600 rupees which he was
earlier paying, that would be a jump from 6% to 10% of his total income. Whereas
for a man earning a minimum 200,000 per month which would put him in the strata
of ‘well off’ in this age, even if he was paying 6000 per month for alcohol and
is now to pay 10,000 it is only a jump from 3% to 5% of his income. Thus the burden on poor man
is much greater. For the poor man, the extra 400 rupees he pays as sin tax would have meant the complete school
fee for one of his children, stationary and all, but for the high earner the increase of 4000 rupees is peanuts.
Sin tax impacts consumer behaviour in a most damaging manner. For
instance it increases the smoker’s propensity to smoke high tar, high nicotine
cigarettes which are cheaper but far more harmful. This causes increase in diseases
like cancer, which is exactly opposite to the objective of imposing sin tax. On administrative and humanitarian grounds this is unacceptable
and from an economic perspective, it increases costs of healthcare for
residents. What is the point of collecting more revenue to help smokers and
alcoholics if you are at the same time automatically increasing the number of
sick and diseased persons who would be eligible for such aid. For instance alcohol
consumers will buy cheaper distils and the really poor would be forced to
consume moonshine produced illegally which has high likelihood of damaging
their liver very fast and may even poison them as many cases have been reported
in India. That it would create a spurt in law and order problems related to
illegal production of moonshine is obvious.
Sin tax has a propensity to not only change the consumption patterns
of the ‘sinners’ but also the priorities of the government. We cannot forget
that government is always only as good as the people who run it. They may
become reliant on the revenue from sin tax and would then have to encourage the
‘sinful’ behaviour in question to maintain the stream of revenue.
Verdict- Governments must not commit the sin of imposing sin tax.
...Divya Gurnay
