To Sin or not to SinTax

The Punjab Government has withdrawn sin tax on cigarettes that it had levied in the 2013-2014 budget.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.

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.

History has shown that sin tax is not an effective method to curb bad habits of members of society and rather creates a range of other complications that put unnecessary pressure on the police, medical facilities as well as the regular law abiding tax payer. Therefore alternative methods must be used such as mass communication efforts and counselling camps to help people kick the bottle and the get rid of the smoke in their lives.

Verdict- Governments must not commit the sin of imposing sin tax.

                                                                                                                   ...Divya Gurnay