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

Tobacco Tendu 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 ProcessBidi Manufacturer

Sorting and

roasting

Packaging

Rolling Contractor

Rolled BidisTobacco, tendu

leaves and thread

Rollers Rollers 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 ofmachine-made bidis

98%

2%

Handmade bidisMachine-made bidis

14

26

0

5

10

15

20

25

30

Handmade Machine-made

Ex

cis

e D

uty

(R

s p

er

1,0

00

sti

ck

s)

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)

91.8%

8.2%

Bidis consumedCigarettes consumed

5.7%

94.3%

Bidi excise taxesCigarette excise taxes

Excise Tax Burden for Bidis is Much Lower than for All Types of

Manufactured Cigarettes

2.181.58

0.7

1.323

0.819

0.546

0.150.33

0.0140.168

0

1

2

3

4

>70-75 mm </=70 mm >60-70 mm </=60 mm Bidis

Tota

l co

st in

Rs

per

sti

ck

(bas

e p

rice

+ t

ax)

Excise tax dutyBase price

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

1759

1323

819

546

16814

0

500

1000

1500

2000

>75-85mm

>70-75mm

</=70mm >60mm </=60mm Bidis*

Excis

e T

ax

(Rs p

er

1,0

00 s

ticks,

2007/0

8)

Cigarettes

* Handmade bidis only, which account for 98% of the bidi market.

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

0

200

400

600

800

1000

1200

1400

Low estimate High estimate

Bid

is c

on

sum

ed(b

illio

ns

of

stic

ks)

Non-tax-paid bidisTax-paid bidis

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

0

5000

10000

15000

20000

2500093

/94

94/9

5

95/9

6

96/9

7

97/9

8

98/9

9

99/0

0

00/0

1

01/0

2

02/0

3

03/0

4

04/0

5

05/0

6

Cig

aret

te C

on

sum

pti

on

(No

n-f

ilter

</=

60m

m,

mill

ion

s o

f st

icks

)

0

20

40

60

80

100

120

140

160

Exc

ise

Tax

Rat

e(N

on

-filt

er <

/=60

mm

,R

s p

er 1

,000

cig

., cu

rren

t R

s)Micro non-filter cig. consumptionExcise tax rate

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 2008-2009

• 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