A DIAGNOSTIC OF THE HEALTH TAXES LANDSCAPE IN INDIA DISCUSSION PAPER OCTOBER 2024 Rijo M. John Edson C. Araujo A DIAGNOSTIC OF THE HEALTH TAXES LANDSCAPE IN INDIA Rijo M. John Edson C. Araujo October 2024 Health, Nutrition, and Population (HNP) Discussion Paper This series is produced by the Health, Nutrition, and Population Global Practice of the World Bank. The papers in this series aim to provide a vehicle for publishing preliminary results on HNP topics to encourage discussion and debate. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors, or to the countries they represent. Citation and the use of the material presented in this series should take into account this provisional character. The World Bank does not guarantee the accuracy of the data included in this work. 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Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202- 522-2625; e-mail: pubrights@worldbank.org. © 2023 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW, Washington, DC 20433 All rights reserved. i Health, Nutrition, and Population (HNP) Discussion Paper A DIAGNOSTIC OF THE HEALTH TAXES LANDSCAPE IN INDIA Rijo M. Johna and Edson C. Araujob a Consultant, World Bank, and Adjunct Professor, Rajagiri College of Social Sciences, Kochi, India b Senior Economist, World Bank, Washington, DC, USA Abstract: The consumption of tobacco, alcohol, and sugar-sweetened beverages (SSBs) in India leads to significant public health and economic challenges, with 1.6 million deaths and 49.3 million disability-adjusted life years lost annually. These products are major risk factors for noncommunicable diseases, responsible for 64.9 percent of all deaths in India as of 2019. India is the world's second-largest tobacco consumer, with declining but still a substantial 267 million tobacco users. Alcohol consumption has seen per capita increases among drinkers, and India leads globally in sugar consumption. The economic burden from diseases related to these products is considerable, with tobacco-related costs at US$36.2 billion annually and alcohol-related costs at US$31.4 billion. Health taxes have been effective globally in reducing consumption and generating revenue while addressing market failures from negative externalities and internalities. India's current indirect tax system, involving a national-level Goods and Services Tax (GST) on tobacco and SSBs, as well as state- level excise duties and value added tax (VAT) on alcohol, poses challenges due to its complexity and inconsistencies. Tobacco products are taxed under GST at 28 percent with additional cesses, but rates remain well below the World Health Organization's recommendations, and its structure is highly complex. The GST applied on SSBs is not commensurate with the product’s sugar content. Excise duties and VAT applied on alcoholic beverages vary significantly across states. Reforming health taxes requires addressing these inconsistencies, improving tax compliance, and introducing new tax structures based on the relative harm of each product. Empirical evidence on the effectiveness of health taxes in India is limited, particularly for alcohol and SSBs. Policy priorities include increasing specific excise taxes, replacing compensation cess with health tax, simplifying the tax structure, regulating marketing practices, and detailed state-level analysis of alcohol taxation to find a preferred taxation regime on alcohol. Keywords: Health taxes, tobacco, alcohol, sugar-sweetened beverages, India Disclaimer: The findings, interpretations, and conclusions expressed in the paper are entirely those of the authors, and do not represent the views of the World Bank, its Executive Directors, or the countries they represent. Correspondence Details: Edson C. Araujo, Senior Economist, World Bank,1818 H Street, Washington, DC, USA Telephone: + 202-290-8150; E-mail: earaujo@worldbank.org ii TABLE OF CONTENTS 1 INTRODUCTION 1 2 WHY HEALTH TAXES MATTER 3 2.1 RATIONALE FOR EXPANDING HEALTH TAXES 3 2.2 HEALTH TAXES AS A FISCAL POLICY INSTRUMENT 4 3 THE CONSUMPTION OF UNHEALTHY PRODUCTS IN INDIA 7 3.1 THE CONSUMPTION OF TOBACCO 7 3.1.1 Sales of Tobacco 10 3.2 THE CONSUMPTION OF ALCOHOL 11 3.2.1 Sales of Alcohol 12 3.3 THE CONSUMPTION OF SSBs 13 3.3.1 Sales of SSBs 15 4 ECONOMIC BURDEN ASSOCIATED WITH THE CONSUMPTION OF UNHEALTHY PRODUCTS 17 4.1 BURDEN OF TOBACCO 18 4.2 BURDEN OF ALCOHOL 19 4.3 THE BURDEN OF SSBS 20 5 HEALTH TAXES IN INDIA 21 5.1 INDIRECT TAX SYSTEM IN INDIA 21 5.2 TAXATION OF UNHEALTHY PRODUCTS 21 5.2.1 Taxation of Tobacco 21 5.2.2 Taxation of Alcohol 26 5.2.3 Taxation of SSBs 30 5.2.4 Salient Features of GST on Unhealthy Products 33 5.3 TRENDS IN PRICE AND AFFORDABILITY OF UNHEALTHY PRODUCTS 35 5.3.1 Price and Affordability of Tobacco Products 36 5.3.2 Price and Affordability of Alcohol Products 37 5.3.3 Price and Affordability of SSBs 39 5.4 EMPIRICAL EVIDENCE AROUND HEALTH TAXES IN INDIA 40 6 HEALTH TAXES IN INDIA: CHALLENGES AND OPPORTUNITIES 43 6.1 CHALLENGES TO REFORM HEALTH TAXES IN INDIA 43 6.2 KNOWLEDGE GAPS 47 6.3 POLICY PRIORITIES 49 REFERENCES 51 ANNEX I: ADDITIONAL EVIDENCE 59 iii LIST OF TABLES Table 3.1: Tobacco Use Prevalence in India, 2019-21 (in percentage) 8 Table 3.2: State-Wise Prevalence of Tobacco Use among Indian Adults, 2019–2021 (in percentage) 9 Table 3.3: Current Alcohol Use Prevalence in India, 2019 –2021 (in Percentage) 11 Table 3.4: State-Wise Prevalence of Alcohol Use among Indian Adults, 2019 –2021 12 Table 3.5: Trends in Alcohol Sales in India, 2013 –2022 13 Table 3.6: Prevalence of Aerated Drinks in India, 2019 –2021 14 Table 3.7: State-Wise Prevalence of Sugar-Sweetened Beverage Consumption among Indian Adults, 2019 –2021 15 Table 3.8: Trends in Soft Drink Sales in India, 2013–2022 16 Table 5.1: Structure and Rate of Tax on Tobacco Products, FY2023/24 .......................................................................... 23 Table 5.2: Price and Tax Burden of Cigarettes in South Asian and BRICS Countries, 2020 ............................................ 25 Table 5.3: State-Wise Legal Minimum Age for Alcohol Consumption/Purchase in India ................................................... 26 Table 5.4: State-Wise Excise Revenue and Its Share in the State’s Own Tax Revenue ................................................... 28 Table 5.5: Average Price 500 mls Beer in South Asian and BRICS Countries, 2016 ........................................................ 30 Table 5.6: GST Rates on Non-alcoholic Beverages in India, 2023–2024.......................................................................... 32 LIST OF FIGURES Figure 3.1: Trends in Sales of Cigarettes and Smokeless Tobacco in India, 2013–2022 10 Figure 4.1: Burden of Diseases due to Alcohol, Tobacco, and Sugar-Sweetened Beverage Consumption, India, 2019 .. 18 Figure 5.1: Revenues from Excise and Goods and Services Tax, Tobacco Products in India, FY2011/12 –FY2019/20 ... 24 Figure 5.2: State-Wise Excise Duty Collection, 2021–2022 .............................................................................................. 27 Figure 5.3: Trends in Excise Tax Revenue and Duty Rate on Soft Drinks in India ............................................................ 33 Figure 5.4: Trends in the Affordability of Cigarettes and Smokeless Tobacco in India ...................................................... 37 Figure 5.5: Trends in the Affordability of Alcohol Products in India, 2013 –2022 ............................................................... 39 Figure 5.6: Trends in Affordability of Selected Sugar-Sweetened Beverages in India, 2013–2022................................... 40 iv ACKNOWLEDGMENTS The report was developed under the HNP GP “Health Taxes in India” with the support of the World Bank Global Tax Program Health Tax Workstream and was prepared by a team comprising Rijo M. John (Consultant, World Bank, and Adjunct Professor, Rajagiri College of Social Sciences, Kochi, Kerala) and Edson C. Araujo (Senior Economist, World Bank). Critical inputs were provided by Ajay Tandon (Lead Economist, World Bank), Mohan Nagarajan (Senior Economist, World Bank), Bernardo Dantas Pereira Coelho (Economist and World Bank Consultant), and Evan Harold Blecher (Senior Consultant, World Bank). The report benefited from comments and invaluable insights received from Kate Mandeville (Senior Health Specialist, World Bank), Violeta Vulovic (Senior Economist, World Bank), and Jeffrey Drope (Research Professor, Johns Hopkins Bloomberg School of Public Health). This product was supported by the Health Taxes Workstream under the Global Tax Program (GTP) of the World Bank, which provides support to countries in strengthening domestic resource mobilization. The authors are grateful to the World Bank for publishing this report as an HNP Discussion Paper. v 1 INTRODUCTION Every year about 1.6 million deaths and loss of 49.3 million disability-adjusted life years (DALYs) are attributable to the consumption of alcohol, tobacco, and sugar-sweetened beverages (SSBs).1 The consumption of these “demerit” products is among the top risk factors related to death and disabilities that have not changed or have been increasing in the past decade. These consumptions result in high medical expenditures, lower life expectancy at birth, reductions in the quality of life, and other adverse effects. Noncommunicable diseases (NCDs) accounted for 64.9 percent of all deaths in India in 2019, up from only 35.9 percent in 1990. Worldwide, the consumption of these products is associated with more than 11 million deaths every year, and the associated impacts in terms of economic burden and premature mortality disproportionately affects low- and middle-income countries (LMICs) and those in lower socioeconomic status (SES) (IHME 2020; Lane, Blecher, Nagy, et al. 2023; Summers 2018). Demerit products do not fall under the category of essential goods for human consumption . Rather, they should be recognized as indulgences, which throughout history have consistently faced substantial taxation. In his renowned 1776 publication, The Wealth of Nations, the economist and philosopher Adam Smith made a compelling argument that items like sugar, rum, and tobacco are not essential for sustaining life, yet they are widely consumed by the masses. Consequently, he advocated for their taxation, asserting that such measures would alleviate the burden of heavy taxes imposed on necessities and raw materials used in manufacturing processes (Smith 1776). Traditionally, the excise taxes levied on demerit products like tobacco, alcohol, and SSBs are known as health taxes (or sin taxes). The excise taxes distinguish themselves from other indirect taxes like value added tax (VAT) or Goods and Services Tax (GST) because of their ability to specifically target particular goods and services. The main objective behind implementing a health tax is to render demerit products less affordable, thereby discouraging their consumption, which is widely recognized as a significant risk factor for numerous NCDs. Given that these health taxes also serve as a convenient revenue source that can be readily accessed in times of necessity, imposing such tax is considered a win-win for the sake of public health as well as for government revenues. As a policy tool, excise taxes are one of the most cost-effective ways to tackle consumption of these products. However, it is not just the tax rates that matter. Overall design of health taxes requires considering rates as well as the structure (i.e., ad valorem, mixed or specific) and base (i.e., value or volume, alcohol or sugar content). Further, the way that these taxes are implemented and enforced matters. Policy is only as good as the underlying tax and customs administration capacity that is in place to support collection. Developing efficient and effective tax administration ensures that the impact of health taxes is maximized and 1World Health Organization defines SSBs to include all types of beverages containing free sugars, and “these include carbonated or noncarbonated soft drinks, fruit/vegetable juices and drinks, liquid and powder concentrates, flavoured water, energy and sports drinks, ready-to-drink tea, ready-to-drink coffee and flavoured milk drinks.” 1 not undermined by tax avoidance and evasion, including illicit trade. Finally, the ecosystem in which health taxes evolves matter: health taxes are part of larger tax systems, and recognizing this is critical to their success (World Bank 2022). This report provides an overview of the health taxes landscape in India. It provides a description of the current excise tax system; analyzes tax structures, bases, rates, prices, affordability, consumption/sales/volumes, and tax revenue; and identifies challenges and areas for change. The analysis presented in this report is a critical entry point to work on the administrative side, as well as to ensure that policy reforms align to existing capacities, particularly at state level. The diagnostic will also inform and guide the empirical work to be implemented at the federal level and in (selected) states in India. The report is structured as follows: Chapter 2 discusses the importance of health taxes including the rationale and how they can be used as a fiscal policy instrument to regulate the consumption of unhealthy products; chapter 3 presents data on the consumption and sales of unhealthy products such as tobacco, alcohol, and SSBs in India; chapter 4 discusses the economic burden associated with the consumption of these products with special focus on India; chapter 5 presents a detailed discussion of the indirect tax system with a special focus on the taxation of unhealthy products in India (this chapter also analyzes the trends in affordability of unhealthy products in India); chapter 6 discusses the various challenges in implementing increased health taxes in India while pointing out knowledge gaps and policy engagement priorities as far as unhealthy products are concerned. 2 2 WHY HEALTH TAXES MATTER 2.1 RATIONALE FOR EXPANDING HEALTH TAXES Significant market failures due to negative externalities and internalities characterize the markets for demerit products. These failures lead to detrimental consumption patterns, avoidable premature loss of life, and substantial economic burdens on society, and justify high taxation. For example: a) Correcting For Negative Externalities: A negative externality arises when the consumption of a demerit product imposes costs or consequences on others, which are not directly borne by the consumer. It manifests as a spillover effect that impacts third parties who are not the immediate consumers of the product. For example, secondhand smoke is a well-known negative externality of smoking. Approximately 1.2 million nonsmokers die each year from exposure to secondhand smoke (WHO 2021a). Alcohol generates negative externalities, including domestic violence, drunk driving, and other risky behaviors (Lane, Blecher, Nagy, et al. 2023; WHO 2022a). Similarly, the public health expenditures to treat diseases related to consumption of unhealthy goods are shared by the whole population through taxes. Since these negative externalities are an uninternalized cost of consumption on society, applying a discriminatory excise tax helps to correct them. b) Correcting For Negative Internalities: A negative internality arises when consumers of demerit products make consumption choices that inadvertently harm their own well-being, resulting in health risks, financial burdens, or other detrimental outcomes. This can occur due to the consumer’s limited understanding of a product's attributes, often influenced by persuasive marketing tactics. Moreover, the consumption of these products often begins at a very young or adolescent age, wherein the consumers may not adequately consider potential future ill health consequences, or they may disproportionately undervalue such consequences due to time-inconsistent preferences, habit strength, and the addictive nature of these products (World Bank 2023; Allcott, Lockwood, and Taubinsky 2019). The consumption of tobacco, alcohol, and SSBs often occurs due to a lack of information regarding their harmful effects and a lack of self-control (Lane, Blecher, Nagy, et al. 2023; Allcott, Lockwood, and Taubinsky 2019). Individuals often fail to overcome instant urges over the long- term ill health outcome from their consumption (Gruber and Köszegi 2001). This is also the reason these goods are termed “temptation goods (Banerjee and Mullainathan 2010).” These characteristics of demerits provide an additional case for taxing them more heavily than other goods and services (Allcott, Lockwood, and Taubinsky 2019; Gruber and Köszegi 2009). The negative externalities and internalities differ from “health harms.” A consumer can make a rational choice to smoke, drink alcohol, or consume sugary beverages if the pleasure derived outweighs the associated health risks. Nevertheless, the crucial aspect lies in determining whether their consumption inflicts harm on others (externalities) or themselves by not fully accounting for the consequences (internalities) (Allcott, Lockwood, and Taubinsky 2019). Taxing goods that possess negative externalities and/or negative internalities aligns with economic reasoning, as it allows for the potential enhancement of welfare by reducing 3 consumption to a socially efficient level (Allcott, Lockwood, and Taubinsky 2019). Taxation also has a more significant impact on younger people, as they are at a higher risk of initiating unhealthy product consumption and are more responsive to prices. While taxation helps to mitigate the negative welfare effects associated with the consumption of demerits, the revenue from such tax could be a significant source of finance for the cost of health care or other development programs. As of 2020, excise taxes were implemented on tobacco in 168 countries (Lane, Blecher, Nagy, et al. 2023). Additionally, in 2016, excise taxes were levied on beer in 155 countries, on spirits in 154 countries, and wine in 139 countries (Lane, Blecher, Nagy, et al. 2023). As of 2022, more than 85 countries have levied taxes on SSBs as well (WHO 2022c). Because most demerit products are relatively more price inelastic, an increased tax on them often results in increased revenue (WHO 2021b, 2022c). This could potentially reduce the need for taxing other essential commodities. Additionally, due to the harmful nature of consuming these products and the prevalent public support for discouraging their use, raising taxes on them is often met with approval from the general public. 2.2 HEALTH TAXES AS A FISCAL POLICY INSTRUMENT The influence of health taxes on demerit consumption is contingent on the price elasticity coefficient, which reflects the price sensitivity of these products. The evidence, from both high-income countries (HICs) and LMICs, demonstrates that unhealthy products exhibit price sensitivity, indicating that taxation can serve as a powerful tool to reduce consumption. Several studies have examined the price elasticity of various demerit products in different countries: a) Price Elasticity for Tobacco: The existing literature indicates that the average price elasticity of demand for tobacco in HICs is -0.4 (ranging from -0.2 to -0.6), while estimates for LMICs are more diverse, typically clustering around -0.5 (ranging from -0.2 to -0.8) (WHO 2021b; NCI and WHO 2016). b) Price Elasticity for Alcohol: a recent systematic umbrella review examining the price responsiveness of alcohol in both LMICs and HICs discovered consistent negative own-price elasticities for alcohol demand (Guindon et al. 2022). The study found that the own-price elasticities for beer, wine, and spirits were approximately -0.3, -0.6, and -0.65, respectively. Additionally, the review concluded that the own-price elasticities for alcohol in LMICs were comparable to those observed in HICs. A recent meta-analysis encompassing studies from 14 countries demonstrated that doubling alcohol taxes or implementing minimum unit pricing at Int$0.90 per 10 grams (g) of pure alcohol resulted in a significant 10 percent reduction in consumption (Kilian et al. 2023). c) Price Elasticity for SSBs: Studies on the own-price elasticities of demand for SSBs show the estimated own-price elasticities typically fall within the range of approximately -0.8 to -1.3, with a mean of approximately -1.0 (WHO 2022c). Studies conducted in HICs indicate elasticities around -0.8, while research from LMICs suggests similar or even greater elasticities (WHO 2022c). For example, a recent systematic review and a meta-analysis of 62 studies in LMICs found the demand for SSBs was highly sensitive to tax-induced price increases, with a slightly higher price elasticity of demand of −1.59 4 (Andreyeva et al. 2022). Although any tax that is applied on demerit products may be referred to as a health tax, the term "health taxes" typically pertains specifically to excise taxes (Lane, Blecher, Nagy, Types of Taxes et al. 2023). It is important to note Indirect taxes applied on the production and sales of goods and that taxes, such as VAT, GST, or services can be of different types: sales taxes, are not considered Excise duty: It is a type of tax imposed on the production or health taxes since they do not alter manufacture of goods and is often applied to specific goods like relative prices and, therefore, do not alcohol and tobacco designed to discourage their use. It is usually effectively reduce consumption by applied on the ex-factory price. promoting increased cessation, Value added tax (VAT): It is a consumption tax levied on the value reduced initiation, and decreased added to goods and services at each stage of production or distribution. intensity of use unless they are designed to be distinct for the Goods and Services Tax (GST): It is a consumption tax and a demerits. Excise taxes are uniquely successor to the VAT in India. It is destination-based—tax is collected in the state where the goods or services are consumed — discriminatory and somewhat and is fully digitized, which allows proper tracking of goods and distortionary, enabling effective services. targeting of negative externalities Cess: A cess is a tax levied for a specific purpose, such as and internalities to discourage education or health. It is imposed in addition to other taxes. harmful consumption, resulting in Apart from these, there are also other types of indirect taxes such positive welfare outcomes (Sassi, as customs duties, entertainment tax, stamp duty, etc. Belloni, and Capobianco 2013). While the excise tax can be either specific or ad valorem, specific taxes are preferred and more effective because externalities and internalities are not determined by the value but by the amount of the product when the tax is specific (WHO 2021b, 2022c). Cheaper cigarettes are not inherently less harmful or addictive than more expensive ones; the harm and addiction are closely tied to consumption quantity, which specific taxes address (World Bank 2023). Specific taxes lead to reduced consumption, especially of cheaper brands, resulting in lower market price variance and fewer incentives to switch to cheaper options (Chaloupka, Powell, and Warner 2019). Moreover, compared to ad valorem taxes, specific taxes are more likely to be fully passed through or overshifted, leading to better health outcomes through higher prices, larger price increases, decreased affordability, and lower consumption (World Bank 2023). The argument against health taxes is that they disproportionately harm the poor —they are regressive—due to their relative higher consumption of demerit products. However, this argument fails to consider the wider health and economic harms caused by the consumption of demerits. Given the relatively larger price sensitivity for these products among the poor, a tax increase would imply a larger reduction in the consumption of these products among them, which results in larger reductions in health and economic harm among them. In other words, lower-income individuals have larger internalities from the consumption of demerit products, and a tax- induced consumption reduction would likely benefit them more due to greater potential for the reduction of 5 internalities (Allcott, Lockwood, Taubinsky 2019). Once taking these factors into account, health taxes can be seen as progressive rather than regressive. 2 For example, while tobacco taxes are frequently criticized for their short-run regressive impact, several recent studies (Fuchs et al. 2019; Fuchs and Meneses 2017; Cruces, Falcone, and Puig 2023; Chaloupka et al. 2022) show that if we take a more comprehensive view of the costs and benefits of increasing prices of tobacco on household welfare, the benefits of tobacco taxes significantly outweigh the increase in tax liability, thus leading to a more favorable income redistribution for lower-income households. Health taxes have been used effectively across many countries in the world to control the menace of demerit products. It is estimated that over 50 years, implementing a 50 percent tax increase on tobacco products would prevent 27.2 million deaths and raise US$3 trillion, while a similar tax increase on alcohol products would prevent 21.9 million deaths, and a 50 percent tax increase on sugary drinks would prevent 2.2 million deaths (WHO 2022b). Implementing a 50 percent increase in excise taxes on tobacco, alcohol, and sugary beverages worldwide creates the potential to prevent over 50 million premature deaths in the next 50 years, while generating more than US$20 trillion in additional revenues (Tobacconomics 2019). 2 Tax regressivity refers to a situation where the tax burden falls disproportionately on lower-income individuals or households. Whereas, tax progressivity refers to a situation where the tax burden increases as income levels rise. Taxation systems are supposed to be progressive with the goal of achieving a greater income redistribution and reducing income inequality. 6 3 THE CONSUMPTION OF UNHEALTHY PRODUCTS IN INDIA 3.1 THE CONSUMPTION OF TOBACCO India is the second-largest consumer of tobacco globally, with an estimated 267 million individuals above the age of 15 using tobacco in various forms (smoked and smokeless) (India, MoHFW 2017). This accounts for approximately 19 percent of the world's adult tobacco users (WHO 2012). Tobacco use in India is unique compared to many other countries due to the presence of a diverse range of products, including cigarettes, bidi (an indigenous smoking product with tobacco rolled within tendu leaves), and various chewing or smokeless tobacco (SLT) products such as Khaini and Gutkha. Newer tobacco products such as electronic nicotine delivery devises (ENDS) and heat-not-burn products (HTPs) are not considered in this study as these products are officially banned in India. There is a strong gender gradient for smoking in India . The prevalence of smoking among men is nearly 10 times higher than among women according to the Fifth National Family Health Survey (NFHS-5), 2019– 2021 (Table 3.1). Additionally, most of the tobacco consumption among women is in the form of smokeless tobacco, with a 13 percent prevalence (compared to the 2 percent among men). The prevalence of tobacco use as available in NFHS-5 varies from that of the Second Global Adult Tobacco Survey (GATS-2), 2016– 2017. While the prevalence of any tobacco use was 42.4 percent and 14.2 percent among men and women, respectively, as per GATS-2, the same is 40.3 percent and 4.1 percent as per NFHS-5. One reason behind the discrepancy is the difference in the age group. While GATS reports prevalence for all adults at or above 15 years, NFHS-5 reports prevalence data for 15–49 years and 15–54 years for women and men, respectively. There is also a three-year gap between these surveys. Tobacco consumption is also higher in rural areas compared to urban areas. The evidence also shows that those belonging to underprivileged socioeconomic backgrounds are more likely to consume tobacco, and the consumption decreases with an increase in income and age (IIPS 2017, 2022). 7 Table 3.1: Tobacco Use Prevalence in India, 2019-21 (in percentage) Women (15–49) Men (15–49) Tobacco items Urban Rural Total Urban Rural Total Total (15–54) Smoked tobacco Cigarettes 0.1 0.1 0.1 14.6 12.5 13.2 13.3 Bidis 0.0 0.2 0.1 4.5 8.3 7.0 7.8 Cigars 0.0 0.0 0.0 0.6 0.5 0.6 0.6 Pipe 0.0 0.0 0.0 0.1 0.1 0.1 0.1 Hookah 0.0 0.1 0.1 0.3 0.7 0.5 0.6 Smokeless tobacco Paan masala or gutkha 1.0 1.6 1.4 12.0 15.8 14.5 14.2 Khaini 0.4 1.1 0.9 6.6 14.5 11.7 12.1 Paan with tobacco 0.7 1.3 1.1 3.4 6.0 5.1 5.3 Other chewing tobacco 0.2 0.4 0.3 1.5 1.9 1.8 1.8 Snuff 0.1 0.1 0.1 0.0 0.1 0.1 0.1 Other 0.2 0.4 0.3 0.3 0.6 0.5 0.5 Any tobacco 2.5 4.9 4.1 32.1 42.9 39.1 40.3 Source: National Family Health Survey (NFHS-5), 2019-21 Report (Ministry of Consumer Affairs, Food and Public Distribution 2023). There is also a significant heterogeneity in tobacco use prevalence across Indian states as shown in Table 3.2. According to the recent NFHS-5 data, Northern and North Eastern states such as Tripura, Meghalaya, Manipur, and Mizoram, have the highest prevalence of tobacco use, with male tobacco use prevalence exceeding 60 percent. Additionally, women in the North Eastern states also have a significantly higher prevalence of tobacco use compared to the rest of the country. 8 Table 3.2: State-Wise Prevalence of Tobacco Use among Indian Adults, 2019–2021 (in percentage) States Male Female States Male Female (15–54 yrs) (15–49 yrs) (15–54 yrs) (15–49 yrs) Mizoram 70.7 48.1 Uttarakhand 40.1 0.9 Manipur 67.5 41.6 Lakshadweep 38.4 4.4 Meghalaya 63.0 25.2 Himachal Pradesh 36.3 0.2 Tripura 60.0 39.2 Sikkim 35.5 8.7 West Bengal 59.2 5.7 Delhi 35.3 1.6 Odisha 56.1 12.6 Maharashtra 35.3 4.4 Assam 55.9 13.3 Haryana 29.2 0.4 A & N Islands 55.1 17.5 Karnataka 28.8 2.7 Nagaland 53.6 14.1 Goa 24.5 1.0 Jharkhand 50.3 2.4 Andhra Pradesh 24.0 1.2 Madhya Pradesh 49.8 6.2 Chandigarh 22.7 0.0 Bihar 49.3 0.7 Tamil Nadu 21.9 1.1 D & N Haveli 47.6 1.2 Telangana 21.4 1.8 Gujarat 47.1 5.6 Kerala 18.5 0.4 Uttar Pradesh 46.2 3.3 Punjab 16.5 0.1 Chhattisgarh 43.7 7.7 Puducherry 11.4 0.2 Rajasthan 43.3 3.8 All India 40.8 4.0 Source: National Family Health Survey, 2019–2021. Notes: A & N Islands = Andaman and Nicobar Islands; D & N Haveli = Dadra and Nagar Haveli. There is a continued decline in tobacco use prevalence in India . Between 2015–16 to 2019–21, there was 13 percent and 43 percent relative reduction in overall tobacco use prevalence among men and women, respectively, according to NFHS 4 and NFHS 5 (IIPS 2017, 2022). The GATS surveys in 2009–10 and 2016– 17 showed a 17 percent relative reduction in overall tobacco use prevalence (India, MoHFW 2017). Similarly, according to the Global Youth Tobacco Survey (GYTS) from 2003 to 2019, there was a sustained decrease in prevalence for all types of tobacco use among school-going children in India (age group of 13 –15) as well. However, bidi smoking prevalence is still at a similar level as in 2003. Moreover, the decline in prevalence has been much more drastic among boys compared to girls. While the prevalence of any tobacco use witnessed a 56 percent relative reduction among boys, the same was only 24 percent among girls in the period between 2003 to 2019. 9 3.1.1 Sales of Tobacco Figure 3.1: Trends in Sales of Cigarettes and Smokeless Tobacco in India, 2013–2022 a) Trends in volume sales (cigarettes and SLT) b) Trends in value sales (constant 2012 values) 120,000 700 50 45 600 100,000 40 Cigarettes (Rs. billion) 500 35 Smokeless tobacco (Rs. billion) 80,000 Retail volume 30 400 60,000 25 300 20 40,000 200 15 10 20,000 100 5 0 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cigarettes (million sticks) Smokeless tobacco (Tonne) Cigarettes Smokeless tobacco Source: Euromonitor International 2023c. Note: SLT = Smokeless tobacco. Over the last decade, sales volumes for both cigarettes and smokeless tobacco in India have seen a continuous decline. Specifically, cigarette sales have decreased by 13 percent, while smokeless tobacco sales have seen a significant 53 percent reduction (Figure 3.1). This translates to a compound annual growth rate (CAGR) of -1.4 percent for cigarettes and -7.4 percent for smokeless tobacco, underscoring a persistent downward trend in consumption (Euromonitor International 2023c). The sales of cigarettes stand at 87.3 billion sticks and for SLT at 38,000 tonnes, as of the year 2022 (Euromonitor International 2023c). These figures are consistent with the decline in tobacco use prevalence India has witnessed as revealed by both GATS and NFHS data. There are no official statistics on the sales of bidis in India. Nevertheless, a recent study estimated bidi sales and its trends based on per unit excise tax and tax revenue. Study results point to a decline in the number of duty-paid bidi sticks from 393 billion sticks in 1994–95 to 293 billion sticks in 2015–16 (Goodchild et al. 2022). The value of sales of cigarettes has seen an 18.1 percent growth in real terms over the past 10 years (CAGR of 1.7 percent) while that of SLT saw a 54 percent decline (CAGR of -7.4 percent). While the decline in the value of sales for SLT is consistent with a similar volume decline during the period, the value of cigarette sales shows real growth despite the volume decline during the same period. Increased cigarette prices during the period may be a possible reason for the increasing value of sales of cigarettes. In 2022, the total sales value of cigarettes in India amounted to Rs. 1,049 billion in nominal terms, whereas the sale value of SLTs was only Rs. 37 billion. This is even though cigarette use prevalence in India is only 4.0 percent compared to the 21.4 percent SLT prevalence according to the GATS-2. It implies the extremely low unit prices at which SLT products are sold in India, attracting much wider consumption for SLT compared to cigarettes. 10 3.2 THE CONSUMPTION OF ALCOHOL The prevalence of alcohol consumption among adults (18 years or more) in India was estimated in 2019 at 17.1 percent according to data from the Ministry of Social Justice and Empowerment (Ambekar et al. 2019). Country liquor or desi sharab (30 percent), spirits or Indian-made Foreign Liquor (IMFL) or hard liquor (30 percent), beer (21 percent), wine (4 percent), and home-brewed alcohol (11 percent) are some common types of alcoholic beverages used by Indian households (Ambekar et al. 2019). Alcohol use also has a significant gender gradient in India with the prevalence among males and females at 27.3 percent and 1.6 percent, respectively. As per the standards of the World Health Organization (WHO) Alcohol, Smoking and Substance Involvement Screening Test (ASSIST) 3 definition, 19 percent of alcohol users or 2.7 percent of the Indian population are dependent users (Ambekar et al. 2019; Humeniuk et al. 2010). The alcohol consumption for another 2.5 percent of the population can be considered under the harmful category (Ambekar et al. 2019; Humeniuk et al. 2010). Table 3.3: Current Alcohol Use Prevalence in India, 2019–2021 (in Percentage) Women (15–49 yrs) Men (15–54 yrs) Urban Rural Total Urban Rural Total (%) (%) (%) (%) (%) (%) Any alcohol 0.42 0.90 0.75 22.50 23.04 22.85 Tadi madi/Palm wine 0.10 0.48 0.35 1.55 4.40 3.40 Country liquor 0.04 0.22 0.16 4.14 6.14 5.43 Beer 0.20 0.10 0.14 10.62 7.71 8.74 Wine 0.12 0.06 0.08 6.86 5.19 5.78 Hard liquor 0.04 0.03 0.04 7.32 7.49 7.43 Others 0.02 0.11 0.08 0.46 1.44 1.09 Source: National Family Health Survey, 2019–2021. The NFHS, 2019–2021, shows that 23 percent of men (15–54 years) and 0.8 percent of women (15–49 years) use some type of alcohol. The survey also shows significant differences in alcohol prevalence by gender, residence, and product type, with rural populations having a higher prevalence, and with beer and hard liquor more common among men while palm wine and country liquor are more prevalent among women 3The World Health Organization Alcohol, Smoking and Substance Involvement Screening Test (WHO ASSIST) is a tool used to assess a person's risk of alcohol-related problems. The ASSIST is a 10-item questionnaire that asks about a person's drinking habits in the past three months. It divides alcohol consumption into five categories: (1) Low Risk: Minimal harm or risk; (2) Moderate Risk: Potential for occasional issues; (3) High Risk (Hazardous): Substantial risk of harm; (4) Harmful Use: Already causing harm; and (5) Dependent Use: Alcohol dependence or alcoholism. 11 (Table 3.3). The available evidence shows that drinking alcohol is more common among individuals belonging to disadvantaged socioeconomic groups such as Scheduled Tribes (STs) and those with no schooling (IIPS 2022). Other studies point to the contribution of socioeconomic background, family circumstances, and tobacco use, in influencing the consumption of alcohol in India (Jagadeesan and Patel 2021; Nadkarni et al.2022). There is significant heterogeneity in alcohol prevalence across states according to the most recent NFHS (Table 3.4). Higher prevalence among men was found in many southeastern states such as Goa, Mizoram, Telangana, Odisha, and Jharkhand, while the prevalence among women was higher in Sikkim. Between the years 2015 and 2016 and 2019 and 2021, the prevalence of alcohol consumption in India fell from 29.2 percent to 18.7 percent among men and increased from 1.2 percent to 1.3 percent among women both of 15–49 years (IIPS 2017, 2022). Despite various alcohol control measures implemented at both national and state levels during this period, no study has explored whether these measures contributed to the notable decline in alcohol prevalence among men aged 15–49. Table 3.4: State-Wise Prevalence of Alcohol Use among Indian Adults, 2019–2021 States Male Female States Male Female (15–54 yrs) (15–49 yrs) (15–54 yrs) (15–49 yrs) Puducherry 37.6 0.2 Rajasthan 11.9 0.1 Punjab 29.0 0.1 Chhattisgarh 36.8 2.8 Kerala 27.4 0.3 Uttar Pradesh 16.9 0.1 Telangana 50.4 4.9 Gujarat 6.3 0.1 Tamil Nadu 33.9 0.1 D & N Haveli 42.1 0.5 Chandigarh 29.2 0.1 Bihar 17.0 0.1 Andhra Pradesh 31.7 0.2 Madhya Pradesh 20.3 0.4 Goa 58.4 4.8 Jharkhand 40.9 2.6 Karnataka 23.4 0.3 Nagaland 30.5 1.4 Haryana 18.4 0.1 A & N Islands 43.6 2.2 Maharashtra 17.6 0.2 Assam 26.7 5.5 Delhi 28.7 1.4 Odisha 38.5 2.7 Sikkim 34.7 14.8 West Bengal 25.4 0.7 Himachal Pradesh 33.9 0.4 Tripura 35.5 4.3 Lakshadweep 0.8 0.1 Meghalaya 36.4 1.0 Uttarakhand 33.6 0.1 Manipur 48.5 1.6 All India 22.9 0.7 Mizoram 29.0 1.0 Source: National Family Health Survey, 2019–2021. Notes: A & N Islands = Andaman and Nicobar Islands; D & N Haveli = Dadra and Nagar Haveli. 3.2.1 Sales of Alcohol The sales of alcoholic drinks in India have been consistently increasing barring a temporary, albeit sharp, dip in the year 2020 due to the COVID-19–related nationwide lockdown followed by a V-shaped recovery as the pandemic restrictions were relaxed, as shown in Table 3.5. In 2022, about 6.2 billion liters of alcoholic drinks were sold, 54 percent of those sales being in the form of spirits and 45 percent in beer (Euromonitor International 2023a). The volume sales of Ready to Drink (RTD) beverages and wine were quite low, representing about 1 percent of total alcohol sales (Euromonitor International 2023b). Over the last 10 years, 12 the volume sales of alcoholic beverages recorded a 43 percent growth with a CAGR of 3.6 percent despite significant decline of prevalence among men and a marginal increase among women. Recent evidence suggests that it may imply an increase in per capita consumption among drinkers, with per capita consumption more than doubling from 2.3 liters to 5.5 liters between 2000 and 2018 (Rastogi et al. 2022). Despite 43 percent growth in volume sales, the sales value of alcohol has seen a 3.5 percent decline in real terms (CAGR -0.4 percent) over the past 10 years, which indicates falling average unit prices for alcohol products as a whole. In nominal terms, the annual sales of alcohol in India amounted to Rs. 3.27 trillion in 2022, which is more than three times the value of cigarettes sales (Euromonitor International 2023a). Table 3.5: Trends in Alcohol Sales in India, 2013–2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 CAGR (%) Volume of sales (Million liters) Beer 1,808 2,010 2,205 2,349 2,366 2,496 2,689 1,633 2,137 2,789 4.4 RTDs 18 21 26 33 36 41 45 38 41 46 9.9 Spirits 2,507 2,615 2,643 2,713 2,715 2,887 3,008 2,465 2,966 3,337 2.9 Wine 16 19 21 25 28 32 36 31 35 38 9.2 Alcohol 4,349 4,666 4,895 5,119 5,145 5,454 5,779 4,167 5,178 6,210 3.6 (Total) Value of sales (Rs. billions) Beer 285.6 310.4 330.7 347.4 359.7 373.9 394.6 219.9 281.0 355.7 2.2 RTDs 6.1 6.9 8.0 9.3 9.6 10.3 11.2 8.9 9.6 10.6 5.8 Spirits 1,664. 1,682. 1,629. 1,617. 1,658. 1,698. 1,752. 1,261. 1,405. 1,514. -0.9 7 6 8 9 3 7 0 0 0 1 Wine 16.0 19.4 21.2 23.3 24.7 26.2 28.6 21.2 22.1 23.4 3.8 Alcohol 1,972. 2,019. 1,989. 1,997. 2,052. 2,109. 2,186. 1,511. 1,717. 1,903. -0.4 3 3 6 9 3 1 3 0 6 8 (Total) Source: Euromonitor International 2023a. Note: RTDs = Ready to Drink (beverages). 3.3 THE CONSUMPTION OF SSBs India emerged as the world’s largest producer and consumer of sugar in 2021-22 (India, Ministry of Consumer Affairs, Food and Public Distribution 2023). The annual per capita sugar consumption in India stands at approximately 25.17 kilograms, surpassing the global average of 23.70 kilograms per annum (Gupta et al. 2022). The WHO defines (WHO 2022c) SSBs as “all types of beverages containing free sugars, and 13 these include carbonated or noncarbonated soft drinks, fruit/vegetable juices and drinks, liquid and powder concentrates, flavoured water, energy and sports drinks, ready-to-drink tea, ready-to-drink coffee and flavoured milk drinks.” Unfortunately, the prevalence data available to us are only for aerated beverages while the sales data extend to a larger array of sugary beverages. According to the most recent NHFS-5, from 2019– 21, 15.6 percent of women (age group 15–49) and 24.6 percent of men (age group 15–54) consumed aerated drinks at least once in the previous week at the time of the survey (Table 3.6). Aerated drinks, however, form only a subset of SSBs, and not all aerated drinks come with added sugar. Between 2015 and 2016 and 2019 and 20, the percentage of men and women consuming aerated drinks at least once a week decreased from 32.2 percent and 24.0 percent, respectively, to 25.1 percent and 15.6 percent, respectively (Rastogi et al. 2022; India, Ministry of Consumer Affairs, Food and Public Distribution 2023). Table 3.6: Prevalence of Aerated Drinks in India, 2019–2021 Women Men (15–49 yrs) (15–54 yrs) Urban (%) 19.2 29.8 Rural (%) 13.9 21.8 Total (%) 15.6 24.6 Source: National Family Health Survey, 2019–2021. There is state-wide variation in the prevalence of consumption of aerated beverages among Indian adults (Table 3.7). Compared to the national average prevalence of 24.6 percent and 15.6 percent for males and females, respectively, Andhra Pradesh, Himachal Pradesh, Assam, Sikkim Lakshadweep, Andaman and Nicobar Islands, and Goa are some of the states/Union Territories (UTs) that have prevalence of aerated drinks consumption of 30 percent to 52 percent among males and 25 percent to 45 percent among females. Recent evidence from India shows an association between the consumption of aerated drinks with socioeconomic variables like age, sex, marital status, and education (Mathur et al. 2020). 14 Table 3.7: State-Wise Prevalence of Sugar-Sweetened Beverage Consumption among Indian Adults, 2019–2021 States Male Female States Male Female (15–54 yrs) (15–49 yrs) (15–54 yrs) (15–49 yrs) Puducherry 14.5 10.3 Rajasthan 19.9 12.7 Punjab 23.8 13.0 Chhattisgarh 20.5 10.7 Kerala 26.3 15.6 Uttar Pradesh 20.7 12.0 Telangana 28.3 10.8 Gujarat 22.2 21.4 Tamil Nadu 19.5 11.2 D & N Haveli 34.9 18.7 Chandigarh 17.8 24.0 Bihar 23.0 19.2 Andhra Pradesh 41.3 24.5 Madhya Pradesh 15.6 9.8 Goa 52.3 36.1 Jharkhand 13.8 10.2 Karnataka 30.9 25.9 Nagaland 23.0 15.1 Haryana 27.2 17.6 A & N Islands 46.9 29.6 Maharashtra 25.2 16.8 Assam 30.4 25.8 Delhi 22.4 21.8 Odisha 11.2 10.0 Sikkim 30.3 33.7 West Bengal 18.6 13.0 Himachal Pradesh 37.4 32.6 Tripura 16.9 24.2 Lakshadweep 47.5 45.4 Meghalaya 28.9 23.4 Uttarakhand 11.9 10.5 Manipur 19.2 19.8 All India 24.6 15.6 Mizoram 10.8 9.9 Source: National Family Health Survey, 2019–2021. Notes: A & N Islands = Andaman and Nicobar Islands; D & N Haveli = Dadra and Nagar Haveli. 3.3.1 Sales of SSBs The volume sales of soft drinks in India have been consistently increasing over the last 10 years. There was a sharp dip in the year 2020 due to the COVID-19–related nationwide lockdown, which has rebounded since 2021 but not enough to reach prepandemic levels. Over the last 10 years, soft drink (not including bottled waters) volume sales recorded a 49 percent growth, with a CAGR of 4.1 percent even though the prevalence of aerated drinks has declined, among both men and women. This may indicate a significant increase in per capita consumption among existing users of soft drinks and/or a larger shift in consumption toward juices, which recorded high growth. Soft drink sales in India excluding bottled water were valued at Rs. 688 billion in nominal terms during the year 2022 (Euromonitor 2023b). Out of this, carbonates and juices accounted for a 53 percent and 42 percent share, respectively. In the past 10 years, there was a 30 percent growth in value sales of these products in real terms (CAGR 2.7 percent). Despite the 28 percent volume growth in carbonates sales, the sales value of these products declined 3 percent in real terms. Whereas, consistent with the 121 percent growth in volume, the sales value of juice saw 125 percent growth during the past 10 years (Table 3.8). 15 Table 3.8: Trends in Soft Drink Sales in India, 2013–2022 Category 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 CAGR (%) Volume of sales (Million liters) Carbonates 4,302 4,667 4,990 5,316 5,586 6,029 6,515 4,814 5,173 5,487 2.5 Concentrates 38 39 40 41 43 44 46 47 48 50 2.8 Juice 1,276 1,473 1,647 1,779 1,911 2,122 2,352 2,356 2,606 2,824 8.3 Energy drinks 24 26 28 31 33 35 39 26 30 34 3.5 Sports drinks 12 16 20 23 26 30 34 29 35 39 12.6 Soft drinks (total) 5,665 6,236 6,741 7,209 7,619 8,283 9,009 7,294 7,917 8,458 4.1 Value of sales (Rs. billion) Carbonates 215.8 226.8 237.5 245.3 254.5 268.7 284.9 189.9 201.8 209.8 -0.3 Concentrates 6.3 6.5 6.9 7.3 7.6 8.0 8.2 8.2 8.5 8.7 3.2 Juice 74.3 83.8 94.0 102.4 111.2 125.4 141.0 135.1 152.4 167.2 8.4 Energy drinks 8.5 9.3 10.0 10.5 11.3 12.0 12.8 7.9 9.1 9.6 1.2 Sports drinks 0.8 1.1 1.3 1.6 1.9 2.3 2.7 2.2 2.6 2.9 13.1 Soft drinks (total) 306.7 328.5 350.9 368.3 387.7 417.6 450.9 344.5 375.5 399.4 2.7 Source: Euromonitor International 2023b. 16 4 ECONOMIC BURDEN ASSOCIATED WITH THE CONSUMPTION OF UNHEALTHY PRODUCTS Globally, more than 11 million deaths could be prevented by reducing the consumption of tobacco, alcohol, and SSBs (Lane, Blecher, Nagy, et al. 2023). Of these, tobacco consumption accounts for more than eight million deaths per year, approximately three million people die due to alcohol consumption, and about six million deaths occur due to obesity and diabetes, for which the consumption of SSBs is a significant cause (WHO 2021a, 2022a, 2022c). LMICs, including India, are disproportionately affected and face a significant burden from the consumption of these products (IHME 2020; WHO 2022c; Tobacconomics 2019; Thakur et al. 2011; Upadhyay 2012; Bloom et al. 2014). For example, LMICs account for over 80 percent of these preventable premature deaths (Lane, Blecher, Nagy, et al. 2023). In India, the burden of NCDs increased from approximately 38.0 percent in 1990 to nearly 64.9 percent in 2019 (ICMR, PHFI, and IHME 2017). According to the 2019 Global Burden of Disease (GBD) data (IHME 2020), about 1.6 million Indians die every year due to diseases or conditions attributable to the consumption of tobacco, alcohol, and SSBs (Figure 4.1). A large majority (77 percent) of these deaths is attributable to tobacco use, 21 percent to alcohol, and 2 percent to SSB (IHME 2020). For all three risk factors, we can see the attributable deaths among men are much higher than those among women—which is consistent with the gender gradient in consumption of these products in India. The consumption of unhealthy products in India accounts for 49.3 million disability-adjusted life years (DALYs)4 lost in 2019. The large majority (69 percent) of that is due to tobacco, followed by alcohol (30 percent) and SSBs (1 percent). 4 Disability-adjusted life years (DALYs) is a metric used in public health to quantify the overall burden of disease. It combines the years of life lost due to premature mortality with the years lived with a disability or in less than full health. DALYs provide a comprehensive measure of the impact of diseases, injuries, or health conditions on a population's well-being and can help prioritize health care interventions and resource allocation. 17 Figure 4.1: Burden of Diseases due to Alcohol, Tobacco, and Sugar-Sweetened Beverage Consumption, India, 2019 a) Deaths (‘000) b) Disability-adjusted life years (DALYS) 1,231 40 33.87 1,200 35 931 25.78 1,000 30 DALYs (millions) Deaths ('000) 800 25 14.70 20 13.61 600 344 15 317 300 400 8.09 10 200 1.09 0.77 0.46 0.31 5 27 25 15 10 0 0 Tobacco Alcohol SSB Tobacco Alcohol SSB Male Female Both Male Female Both Source: Global Burden of Diseases, 2019. Note: SSB = Sugar-sweetened beverage. 4.1 BURDEN OF TOBACCO Tobacco kills up to half of its daily users according to the WHO (WHO 2021a). While more than 7.0 million people die each year as a result of direct tobacco use, approximately 1.2 million nonsmokers die due to exposure from secondhand smoke (WHO 2021a). The global economic cost of smoking, encompassing direct health expenditures and productivity losses, was estimated to be approximately 1.8 percent of the world's gross domestic product (GDP) in 2012, totaling about US$1.4 trillion (Task Force on Fiscal Policy for Health 2019; Goodchild, Nargis, and d’Espaignet 2018). Out of this, US$1 trillion is lost due to reduced productivity.5 These costs solely pertain to smoking and do not include expenses related to SLT consumption. Available estimates in India indicate that tobacco use –attributable annual deaths were approximately 1,280 million deaths per year or roughly 3,500 deaths every day (John et al. 2021). Of those 930,000 were attributable to smoking, while SLT-attributable annual deaths were estimated at about 350,000. According to the most recent GBD data, 1.23 million deaths and 33.9 million DALYs annually are attributable to tobacco use (IHME 2020). 5Productivity loss was assessed using the human capital method (HCM). This method computes the current value of labor productivity loss arising from morbidity and mortality. To gauge the impact, the figures for smoking-related disability and mortality were transformed into labor years lost, employing the World Bank's employment-to-population ratio specific to each country. 18 The annual economic costs from the consumption of all tobacco products for the population above 35 years old is estimated to be Rs. 1,773.4 billion in the year 2017, amounting to 1.04 percent of India’s GDP (John et al. 2021). For every Rs. 100 that is received as excise taxes from tobacco products, Rs. 816 was lost in terms of economic costs through the consumption of tobacco (John et al. 2021). The direct health expenditures on treating tobacco-related diseases alone accounted for 5.3 percent of total health expenditures in India in 2017. The annual economic burden attributed to diseases and deaths from bidi smoking was Rs. 805.5 billion, for the age group 30–69, in 2017 (John 2019). The economic burden of secondhand smoking was estimated at Rs. 566.7 billion (or 0.33 percent of GDP) in 2017 (John and Dauchy 2022). Hence, together, the annual economic burden from diseases and deaths attributable to smoking, SLT use, and exposure to secondhand smoking amount to 1.4 percent of India’s GDP. Direct spending on tobacco purchases, as well as spending on tobacco use–related diseases, result in the impoverishment of 15 million Indians every year (John et al. 2011). 4.2 BURDEN OF ALCOHOL Worldwide, the harmful use of alcohol results in the deaths of three million individuals annually, accounting for 5.3 percent of global deaths and 132.6 million of DALYs (WHO 2018). It has been estimated that 13.5 percent of all deaths in the age group of 20–39 year olds can be attributed to alcohol (WHO 2018). Alcohol consumption results in substantial social and economic burdens; available evidence shows that the economic costs associated with alcohol consumption range from 1.5 percent to 2.6 percent of GDP, primarily stemming from productivity losses (Manthey et al. 2021). Low-income drinkers and their families bear a higher burden of harm per liter compared to their wealthier counterparts (WHO 2018). In India, 344,000 deaths and 14.7 million DALYs annually are attributable to alcohol use. In 2015 –16, Alcohol Use Disorders (AUDs) were found among 9 percent of adult men in India (Eashwar, Umadevi, and Gopalakrishnan 2020; Murthy 2017). Studies show that alcohol consumption in India is linked to various adverse consequences, including road accidents, domestic violence, strained relationships with family members and colleagues, financial mismanagement, involvement in criminal activities, taking loans, and distress selling during hospitalization (Eashwar, Umadevi, and Gopalakrishnan 2020; Ram et al. 2019; Esser et al. 2016; Sen, Victor, and Saxena 2016; Bonu et al 2005; Dixit, Mukherjee, and Rajan 2023). Alcohol- attributable deaths in India stand at 24.7 per 100,000 population, higher than the averages in South Asia and lower-middle-income countries (22.9) (IHME 2020). According to the substance use survey in 2019, 43.0 percent of alcohol users in India engage in “Heavy Episodic Drinking,” which means consuming more than four drinks on a single occasion, and 18.5 percent exhibit alcohol dependence (Ambekar et al. 2019). According to the National Crime Record Bureau (NCRB), driving under the influence of drugs/alcohol contributed to 1.9 percent of total accidents, resulting in 7,235 injuries to individuals and 2,935 fatalities across the country in 2021. Furthermore, drug abuse/alcohol addiction accounted for 6.4 percent of suicides in the same year, while it was the cause of 9.0 percent of total suicides among males. Notably, the number of suicides attributed to drug abuse/alcoholic addiction increased by 15.2 percent from 2020 to 2021. 19 The annual costs resulting from alcohol use in India, including health care, productivity losses, crime and law enforcement, and road traffic accidents, was estimated at approximately US$31.4 billion in 2013–14 (approximately 2.26 percent of the national GDP) (WHO 2017a). The largest proportion of these costs, 96 percent, was attributed to health care and productivity losses. It was also estimated that for every US$1.00 gained from excise revenue, personal income, and employment due to alcohol use, there is a corresponding loss of US$2.35 in expenditures related to health care, productivity losses, crime and law enforcement, and road traffic accidents associated with alcohol use (WHO 2017a). 4.3 THE BURDEN OF SSBS Every year, the consumption of SSBs is a significant cause of approximately 4.5 million deaths attributed to obesity and 1.5 million deaths attributed to diabetes (WHO 2022c). The consumption of SSBs has been closely linked to the rise in obesity rates, which have nearly tripled globally between 1975 and 2016 (Brownell and Frieden 2009; Ferretti and Mariani 2019). Projections indicate that by 2030, as much as 57.8 percent of the world's adult population could be overweight or obese, leading to serious health consequences (Kelly et al. 2008). The global economic impact of obesity, including health care costs, loss of productive life years, and investment to mitigate the cost, is estimated at US$2 trillion per year, which accounts for nearly 3 percent of global GDP (WHO 2022c). Additionally, the total direct cost of high body mass index (BMI) to health services worldwide is US$990 billion annually, equivalent to over 13 percent of global total health care expenditures (WHO 2022c). In LMICs, the consumption of SSBs and related health conditions has experienced a notable increase, with consumption growing at a rate of 6.6 percent a year between 2009 and 2019 (Baker et al. 2020). There is growing evidence that consumption of SSBs plays a significant role as risk factors contributing to the burden of NCDs in India (Thakur et al. 2011; Upadhyay 2012; Luhar et al. 2018; Basu et al 2014). According to the most recent GBD data, 25,000 deaths and 768,000 DALYs annually are attributable to a diet high in SSBs (IHME 2020). Recent evidence estimates that dietary risks contributed to 51.8 percent and 59.4 percent of the total DALYs from cardiovascular diseases among Indian women and men, respectively (India State- Level Disease Burden Initiative CVD Collaborators 2018). By 2019–20, 24.0 percent of women and 22.9 percent of men in India were overweight or obese, an increase from 24.0 percent and 22.9 percent, respectively, in 2015–16 (IIPS 2017, 2022). 20 5 HEALTH TAXES IN INDIA 5.1 INDIRECT TAX SYSTEM IN INDIA According to the Constitution of India, the central government possesses the authority to impose duties of excise on tobacco and other goods manufactured or produced in India, excluding alcoholic liquors for human consumption. The power to impose excise as well as sales tax/VAT on these products lies solely with the states.6 Therefore, the central government is empowered to tax services and goods up to the production stage, except for alcohol and certain drugs as mentioned in Entry 51 of the State List. On the other hand, states have the power to tax the sale of all goods and levy an excise on alcohol. Accordingly, the central government imposes an excise duty on the production of tobacco and SSBs, while states tax their sales through a VAT applied to the excise-inclusive price of the product. In addition, for alcohol, the state licenses its production and sales and levies the state excise as a tool to regulate its consumption. The GST legislation was implemented by the government of India (GoI) on July 1, 2017 through the One Hundred and First Amendments of the Constitution of India. The GST is a comprehensive, multistage, destination-based tax that brought about fundamental reform in the indirect tax system. It achieved this by merging national excise duties, state-level VAT, and various other duties into a unified system. The GST Council, comprising finance ministers from the central government and all states, governs the tax rates, rules, and regulations. The GST is levied on a graduated basis, with five different “slabs” of 0 percent, 5 percent, 12 percent, 18 percent, and 28 percent, with the highest rate slab applied on select demerits and luxury items. Most goods and services, including tobacco and SSBs, were brought under the scope of GST, whereas alcohol taxation continued to be under the purview of state governments. Since the implementation of the GST, the tax rates on tobacco and SSBs have become uniform nationwide, but the tax rates on alcohol still vary among states. 5.2 TAXATION OF UNHEALTHY PRODUCTS 5.2.1 Taxation of Tobacco Before the introduction of the GST, the excise tax on tobacco products comprised a basic excise duty (BED), a National Calamity Contingent Duty (NCCD), and a health cess all levied on the ex-factory price. Additionally, different state governments levied a VAT, applied to the excise-inclusive price, creating a tax-on-tax situation. This VAT varied between products within each state and within products across different states. For instance, while Manipur had applied a VAT of 13.5 percent on cigarettes, the state of Rajasthan had a VAT rate of 65 percent on cigarettes before the GST came into effect. Similar variations in VAT also existed on other tobacco products. The excise tax was uniform across the country but varied between products based on characteristics 6 As specified in Entry 51 and Entry 54 in the State List. 21 such as type, length, presence of filter tips, and nature of production. For instance, excise on cigarettes differed depending on the length and the presence of a filter tip. For bidis, excise varied based on whether they were machine-made or handmade, although over 98 percent of bidis were handmade (Sunley 2008). Both cigarettes and bidis had specific excise duties. Meanwhile, for SLT, an ad valorem excise was applied, acting as a presumptive tax based on the capacity and speed of the packing machine, with the ad valorem rate varying according to the specific SLT product (John, Dauchy, and Goodchild 2019). With the introduction of the GST in the year 2017, the GST council established a statutory (exclusive) ad valorem rate of 28 percent GST on all tobacco products, accompanied by an additional compensation cess applied only to cigarettes and SLT. Both the GST and cess were levied on the value added at each stage of the supply chain. The purpose of introducing the compensation cess was to provide states with potential revenue compensation under the GST, but only for five years. However, toward the end of the fifth year, in 2022, the government extended the duration of this cess until March 31, 2026 (India, MoF 2022). This compensation had become necessary due to the transition from the pre-GST origin-based system, which favored manufacturing states, to the destination-based GST system, which benefits consuming states. The extension beyond June 2022 was decided by the GST Council to repay loans taken during previous fiscal years, addressing revenue shortfalls exacerbated by the COVID-19 pandemic. The GST subsumed excise, VAT, and other cesses into a uniform tax across the country. However, the NCCD continued to be applied on tobacco products and was not subsumed into the GST. Although subsumed into the GST initially, the excise taxes were reintroduced for tobacco products in the Union budget for 2019–20. However, these reintroduced excise duty rates were so minimal that they would only have a negligible impact on the prices of tobacco products, as evidenced in a recent study (John and Dauchy 2021). During the past six years after the introduction of the GST, only the NCCD rates were revised twice while none of the other rates were changed. It should also be noted that NCCD contributes less than 10 percent of the overall taxes applied on tobacco. Although the GST aimed to simplify the indirect tax system by merging various taxes into a single national system, it inadvertently created further complexity in the tax structure for tobacco products, particularly cigarettes and smokeless tobacco (John, Dauchy, and Goodchild 2019). First, it continued to maintain six different tiers for the purpose of taxing cigarettes as in the pre-GST system. Second, the types of taxes increased under the GST for cigarettes. While there was only BED, NCCD, and VAT during pre-GST for cigarettes, after there are GST, NCCD, BED, and a compensation cess that is part specific and part ad valorem, adding to the complexity. Additionally, GST exempted bidis from the scope of compensation cess, leaving its inclusive tax burden at only 22 percent, thus creating a highly favorable tax treatment for a tobacco product that is most consumed in the country and is as harmful as cigarettes (John 2019). The present GST structure for tobacco products is far from ideal as an effective deterrent for tobacco consumption in the country. Such increased complexity in tax structure was one of the reasons India’s international cigarette tax score, devised by the University of Illinois at Chicago, fell to 1.63 out of 5 in 2018 from 2.75 out of 5 in 2016 (Chaloupka et al. 2021). The total inclusive tax burden from all different taxes currently applied on tobacco products is estimated to be approximately 51 percent for cigarettes, 22 percent for bidis, and 64 percent for SLT. Before the introduction of the GST in 2017, the tax burden was 52.6 percent, 16.0 percent, and 57.1 percent for cigarettes, bidis, and 22 SLT, respectively (John, Dauchy, and Goodchild 2019). Table 5.1 shows the existing tax structure on tobacco products in India. The WHO recommends total tax share to be at least 75 percent of the retail price (WHO 2021b).7 A significant portion of taxes applied to cigarettes and nearly 100 percent of taxes applied to bidis and SLT are ad valorem in nature, which poses challenges in regulating tobacco consumption. Furthermore, the proportion of excise in the overall tax structure is relatively insignificant. A preliminary estimation based on the tax structure of tobacco products indicates that the share of excise tax in total tobacco taxes decreased significantly from pre-GST to post-GST, from about 54 percent to 8 percent for cigarettes, 17 percent to 1 percent for bidis, and 59 percent to 11 percent for smokeless tobacco products. Table 5.1: Structure and Rate of Tax on Tobacco Products, FY2023/24 Product Tax structure and rate as of 2023–2024 Cigarettes (Rs./1,000 sticks) GST NCCD Specific cess Ad valorem Cess Excise (%) (%) (%) (%) Nonfilter ≤ 65 mm 28 230 2,076 5 5 Nonfilter 65 to 70 mm 28 290 3,668 5 5 Filter ≤ 65 mm 28 510 2,076 5 5 Filter 65 to 70 mm 28 510 2,747 5 5 Filter 70 to 75 mm 28 630 3,668 5 5 Filter above 75 mm 28 850 4,170 36 10 Cigarettes (volume 28 615 3,302 16 8 weighted average rates) Bidis (Rs./1,000 sticks) 28 1.02 0 0 0.05 Smokeless tobacco (%) 28 25 104 0.5 Source: Ministry of Finance, Government of India, 2024. Notes: GST = Goods and Services Tax; NCCD= National Calamity Contingent Duty; Cess: GST compensation cess applied as both specific and ad valorem for cigarettes and ad valorem for smokeless tobacco (SLT). SLT tax rates are simple averages of the different rates applied to different SLT products (John, Dauchy, and Goodchild 2019). 7 Countries whose most sold brand of cigarettes has a total tax that is equal to or greater than 75 percent of the retail price are considered to be at the highest level of achievement according to the WHO Technical Manual on Tobacco Tax Policy and Administration, 2021. 23 Figure 5.1: Revenues from Excise and Goods and Services Tax, Tobacco Products in India, FY2011/12–FY2019/20 600 Excise GST & Cess 500 Rs. billion 400 300 200 100 0 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Source: https://data.gov.in/. Note: GST = Goods and Services Tax. The excise tax revenue from tobacco products consistently increased in the period between fiscal year (FY) 2011/12 to FY2016/17 (Figure 5.1). Tax revenue data until FY2016/17 and until June 2017 do not show the revenue from VAT on tobacco collected by multiple state governments. Since excise got subsumed into the GST, one can see the sudden fall in excise tax revenue beginning FY2017/18. The data from 2018–19 onward show the entire taxes on tobacco including both the GST & cess collection by both the center and state governments as well as the excise tax revenue collected by the center. As of the year 2019–20, the gross tax collection from tobacco stands at Rs. 535.4 billion in the form of GST and compensation cess, constituting 4.4 percent of the overall GST tax revenue in that year.75 It also included Rs. 16.1 billion collected as excise tax revenue from all tobacco products in the same year. According to India's Ministry of Finance (MoF), taxes collected from tobacco and pan masala, including GST, compensation cess, and BED account for approximately 2.4 percent of gross tax revenue for FY2022/23 in India (The Economic Times 2023). A comparison of cigarette taxation in India with other South Asian and BRICS (Brazil, Russia, India, China, and South Africa) countries show that India has more room to increase taxes further. Table 5.2 shows the price of the most sold brand of cigarettes as well as its tax share in the final retail price (tax burden), as obtained from the WHO (WHO 2012), along with the cigarette tax score (Chaloupka et al. 2021) in other South Asian and BRICS nations. Among the BRICS countries, India has the highest cigarette prices in terms of international purchasing power parity (PPP) dollars. 8 But the price is nearly three times higher in its neighbor Sri Lanka. Tax burden, which defines tax as a share of retail price, is 57.6 percent in India for the most sold cigarette brand in 2020, while the same is much higher in a few other South Asian countries such as Bangladesh (73.0 8Purchasing Power Parity (PPP) dollars are a measure of the comparative purchasing power of different currencies. They are calculated by comparing the cost of a basket of goods and services in different countries. 24 percent), Sri Lanka (77.0 percent), Maldives (66.0 percent), and Pakistan (61.0 percent). Among BRICS countries, the tax burden is the highest for Brazil at 82.0 percent. India’s cigarette tax score of 1.75 in year 2020 is the second lowest among the BRICS countries, while Russia among BRICS and Sri Lanka among South Asian countries scores the highest with 3.75 and 3.63, respectively. Table 5.2: Price and Tax Burden of Cigarettes in South Asian and BRICS Countries, 2020 Price of a 20-stick pack Tax share in Cigarette tax of the most sold brand retail price score of cigarettes South Asia International US$ Share (%) PPP dollars India 8.66 2.54 57.60 1.75 Afghanistan 1.61 0.39 20.68 0.00 Bangladesh 2.91 1.12 73.00 2.63 Bhutan 17.77 4.81 8.13 — Maldives 11.96 6.49 65.66 2.00 Nepal 7.85 2.32 27.00 1.00 Pakistan 2.06 0.48 60.78 1.13 Sri Lanka 24.92 7.00 77.02 3.63 BRICS India 8.66 2.54 57.60 1.75 Brazil 2.29 1.01 81.55 2.00 Russia 6.07 2.15 56.05 3.75 China 3.60 2.19 54.47 0.88 South Africa 6.45 2.62 52.73 2.38 Source: Chaloupka, Drope, and Siu (2021) Notes: BRICS countries stand for the emerging economies of Brazil, Russia, India, China, and South Africa and comprise about 42 percent of world population. — = Not available. 25 5.2.2 Taxation of Alcohol The authority to levy excise duty and/or sales tax/VAT on alcohol products in India lies with the states. 9 Consequently, alcoholic liquor for human consumption is not subject to the GST. Alcohol was excluded from the scope of GST because it serves as a significant revenue source for the states. Apart from taxes, the consumption of alcohol is also regulated by licensing, legal drinking age laws (Table 5.3), dry days, and outright prohibitions (Tandon et al. 2019). These regulations differ across states, various alcoholic products, and over time, making them complex and heterogeneous across the country (Luca, Owens, and Sharma 2019). The Union government can limit alcohol consumption through policies, such as banning advertisements in the media and through initiatives such as the Scheme on National Action Plan for Drug Demand Reduction (NAPDDR), by the Ministry of Social Justice and Empowerment, which aims to raise awareness among the masses, among other objectives (Eashwar, Umadevi, and Gopalakrishnan 2020; India, Ministry of Social Justice and Empowerment (MoSJE), 2023). The rate of tax, however, is not available in the public domain for most states and product types. A recent study across seven Indian states estimates that tax rates account for a substantial portion of Indian Made Foreign Liquor (IMFL) prices, with taxes comprising about 40 percent to 80 percent of the effective price depending on the state (Gupta et al. 2022). A recent study (Ngo et al. 2021) across 26 Organisation for Economic Co-operation and Development (OECD) countries found that excise tax of beer as a percentage of its retail price varied from as low as 0.04 percent in Luxembourg to 51.0 percent in Iceland in the year 2018. The same for wine, on the other hand, varied from 0 percent in France to 26 percent in Iceland. Table 5.3: State-Wise Legal Minimum Age for Alcohol Consumption/Purchase in India Age States 18 years Goa, Rajasthan, Himachal Pradesh, Andaman & Nicobar, Puducherry, Sikkim 23 years Kerala 25 years Punjab, Meghalaya, Chandigarh, Maharashtra 21 years All other states and Union Territories Banned Bihar, Gujarat, Nagaland, Mizoram except local wine (The Hindu 2022), Lakshadweep except Bangaram (Lakshadweep Tourism 2023), partial prohibition in Manipur (Hindustan Times 2022) Source: The Hindu 2022; Lakshadeep Tourism 2023; Hindustan Times 2022 9 Alcoholic beverages subject to state excise are broadly classified as country spirits, country fermented liquors, malt liquor, liquor, foreign liquors, spirits, commercial and denatured spirits; medicated wines and the applicable rates for each category vary (Tandon et al. 2019). 26 State excise serves as a means for states to regulate alcohol consumption while also being a crucial revenue source that has undergone significant changes over time for certain states (WHO 2017a; Tandon et al. 2019). Alcohol product–specific excise revenue data from each state are not publicly available. However, analyzing the excise data can offer insights into the significance of alcohol in state revenues since it is the primary, and often the only, source of excise revenue for states. The top five states for excise tax revenue, Uttar Pradesh, Karnataka, Maharashtra, Telangana, and West Bengal together generated roughly 54 percent of the total excise tax on alcohol in the country in 2021–22. Figure 5.2: State-Wise Excise Duty Collection, 2021–2022 (Rs. billion) Uttar Pradesh 362.1 Karnataka 245.8 Maharashtra 180.0 Telangana 170.0 West Bengal 155.9 Andhra Pradesh 145.0 Rajasthan 135.0 Madhya Pradesh 103.4 Haryana 87.1 Tamil Nadu 81.7 Punjab 62.0 Odisha 56.4 Chhattisgarh 55.0 NCT Delhi 50.0 Uttarakhand 32.5 Assam 26.9 Kerala 23.3 Himachal Pradesh 19.0 Jharkhand 18.0 Puducherry 10.4 Goa 6.0 Meghalaya 3.6 Tripura 2.9 Sikkim 2.8 Gujarat 1.4 Manipur 0.2 Nagaland 0.0 Mizoram 0.0 Bihar 0.0 0.0 100.0 200.0 300.0 400.0 Source: State Finances statistics by RBI (2020–21 revised estimates). 27 Note: NCT Delhi = National Capital Territory Delhi. The share of excise tax in state own tax revenue (OTR) has increased for several states during recent years (Table 5.4). This trend was accentuated after the introduction of the GST in 2017 –18, when states surrendered their right to impose VAT on goods and services other than alcohol (RBI 2023b). In some states and UTs such as Chhattisgarh, Karnataka, Puducherry, Sikkim, Uttarakhand, Uttar Pradesh, and West Bengal, alcohol excise contributed 20 percent to 34 percent to the state OTR in the year 2021 –22. A state heavily dependent on alcohol-related revenue may be disincentivized to enact consumption-regulating policies due to reluctance to relinquish a significant revenue source. Excise tax is not the sole tax applied to alcohol in many states, some states also impose sales tax/VAT, cess (a temporary duty), and substantial licensing fees in addition to the excise. In some instances, the VAT may even exceed the excise (these additional taxes and fees are not reflected in the values presented in Figure 5.2 and Table 5.4). For example, the majority of Kerala’s tax revenue from alcohol is in the form of sales tax as production is very limited within the state. Hence the 4 to 5 percent figure in Table 5.4 will not be a correct indication of the state’s dependence on alcohol tax. Kerala also started imposing a social security cess on liquor starting in FY2023/24. Tamil Nadu imposes a VAT, excise duty, and a special fee on foreign liquor. Nonetheless, in most states, excise duty remains the predominant portion of the tax structure on alcohol. States with an active ban on alcohol still report positive excise tax collection, as prohibition policies often have exceptions. For instance, in Gujarat, outsiders with special licenses can legally purchase liquor within the state (which can lead to further violations of the ban). Bihar, on the other hand, has a complete ban, prohibiting alcohol consumption entirely. Table 5.4: State-Wise Excise Revenue and Its Share in the State’s Own Tax Revenue States Share of state excise in own tax revenue (in %) Own tax revenue (Rs. billions) 2016– 2017–18 2018–19 2019– 2020– 2021– 2020– 2021– 17 20 21 22* 21 22* Puducherry 27.96 31.14 32.76 35.07 40.97 33.98 7.98 10.36 Uttarakhand 17.49 20.79 23.26 23.68 24.85 23.04 29.66 32.54 Sikkim 23.94 16.04 19.31 21.35 21.75 23.00 2.10 2.75 Uttar Pradesh 16.60 15.80 19.48 22.25 25.07 22.58 300.61 362.12 Karnataka 19.87 19.87 20.45 21.09 24.04 22.05 233.32 245.80 West Bengal 11.49 16.19 17.18 18.51 17.69 21.09 106.66 155.86 Chhattisgarh 18.18 18.44 20.51 22.39 20.25 20.00 46.36 55.00 Andhra Pradesh 10.51 10.42 10.60 12.00 20.16 19.69 115.75 145.00 28 Himachal 18.58 17.27 19.29 21.77 19.79 19.48 16.00 19.03 Pradesh Telangana 11.53 16.19 16.36 17.74 21.56 18.30 143.70 170.00 Rajasthan 15.90 13.39 14.94 16.19 16.34 16.30 98.53 135.00 Punjab 15.88 16.31 15.95 16.22 20.51 16.29 61.64 62.00 Madhya Pradesh 17.04 16.51 18.31 19.40 17.49 16.08 95.26 103.40 Meghalaya 14.25 10.56 11.97 14.61 18.11 13.96 3.75 3.60 Odisha 12.19 10.37 12.66 13.91 11.83 13.59 40.53 56.35 Haryana 13.56 11.87 14.14 14.76 16.38 13.40 68.64 87.10 NCT Delhi 13.65 12.47 13.73 13.86 13.96 13.04 41.08 50.00 Tripura 11.48 10.06 11.51 11.02 13.84 13.01 2.87 2.93 Assam 7.98 7.08 8.52 9.98 11.91 12.25 20.40 26.92 Goa 7.53 8.22 9.81 10.46 12.14 10.46 5.15 5.98 Jharkhand 7.23 5.80 7.34 11.98 10.79 8.69 18.21 18.00 Maharashtra 9.00 7.83 8.13 8.17 9.19 7.92 150.89 180.00 Tamil Nadu 7.27 6.03 6.47 6.71 7.37 6.70 78.22 81.67 Kerala 4.79 4.65 4.94 4.48 4.89 3.96 23.29 23.30 Manipur 1.59 0.77 0.71 0.96 0.91 0.89 0.12 0.17 Nagaland 0.91 0.43 0.50 0.34 0.44 0.22 0.05 0.03 Gujarat 0.24 0.12 0.16 0.17 0.19 0.13 1.34 1.41 Mizoram 16.36 7.67 8.21 0.37 0.15 0.13 0.01 0.01 Bihar 0.12 0.00 0.00 Source: Estimated from State Finances statistics by RBI. Notes: NCT Delhi = National Capital Territory Delhi. *Figures for the year 2020–21 are revised estimates. In actual US$ terms, India seems to have the lowest retail price for beer among South Asian and BRICS nations, as seen in Table 5.5, which shows the price of 500 milliliters (mls) of beer for the year 2016, obtained from the WHO (WHO 2012, 2020). However, India has the highest beer prices in terms of international purchasing power parity (PPP) dollars, after Afghanistan. 29 Table 5.5: Average Price 500 mls Beer in South Asian and BRICS Countries, 2016 Countries Price (US$) International PPP dollars South Asia India 1.03 3.66 Afghanistan 1.39 4.04 Bangladesh 2.34 2.84 Bhutan 0.43 3.51 Maldives 2.90 1.65 Nepal 1.86 3.60 Pakistan 1.94 3.36 Sri Lanka — — BRICS India 1.03 3.66 Brazil 1.30 1.60 Russia 1.46 2.68 China 1.19 1.67 South Africa 1.15 2.40 Source: WHO Global Information System on Alcohol and Health (WHO 2020). Notes: BRICS = Brazil, Russia, India, China, and South Africa; mls = milliliters; — = Not available; purchasing power parity (PPP) dollars were estimated using exchange rate data and PPP conversion from the World Bank World Development Indicators data. 5.2.3 Taxation of SSBs Before the introduction of GST, SSBs were subject to both central excise duty and state-level VAT (which varied from state to state). The excise duty was applied as a percentage of the retail price after adjusting for a specified abatement. The abatement rate determines the amount that is reduced from the final retail price of a good to decide its assessable value to apply excise duty, mostly in cases where excise duty is applied as a percentage. For example, if the abatement as a percentage of the retail price is 30 percent, then the excise rate is applied only on the retail price minus the abatement component, that is, 70 percent of the retail price in this case. The excise rates varied depending on the product characteristics as specified in chapter 22 of the Central Excise Tariff schedule, which provides excise tax information on all nonalcoholic beverages. A 21 30 percent rate was applied on aerated beverages with added sugar while a 12.5 percent was applied on those without added sugar as well as juices and other nonalcoholic beverages. Apart from the excise tax, different states in India also imposed varying VAT on SSBs. At the time of GST introduction, the prevailing VAT rates on SSBs ranged from 12.5 percent in Chandigarh to 30 percent in Punjab, with the simple average VAT rate across states being 15.8 percent. For juice, the rates varied from 5.0 percent in several states to 14.5 percent in Kerala, with an average rate of 6.8 percent. Upon the introduction of the GST, the VAT subsumed into the GST, and a rate structure was defined for nonalcoholic beverages by the GST Council. These rates have remained mostly unchanged for over six years. Table 5.6 shows the current tax rates for various nonalcoholic beverages in India. Most SSBs fall under the highest statutory rate tier of 28 percent, while some others are subject to lower rates of 18 percent and 12 percent. Additionally, certain products also carry a 12 percent compensation cess on top of the GST. The total statutory rate of 40 percent effectively means a total tax burden of about 28.6 percent on the highest taxed SSBs as observed in a recent study (John, Tullu, and Gupta 2022). However, it should be noted that the application of a higher tax rate on non-alcoholic beverages under the GST is not linked to the presence or amount of sugar content. For instance, the highest GST rate of 28 percent along with a 12 percent compensation cess is imposed on all aerated and carbonated drinks, although some of these drinks come with zero-sugar. Similarly, only 12 percent GST rate is applied on juice irrespective of whether or not the juice contains added sugars or sweeteners. With the introduction of GST, SSB taxation in India has deviated further from international best practices. According to the WHO (WHO 2023) excise taxes are preferred from a public health perspective as they increase the relative price of SSBs compared to other products and services in the economy, thus helping to reduce affordability. These taxes should encompass all beverages containing free sugars (i.e., all SSB types) to deter unfavorable substitutions from taxed beverages to untaxed beverages containing free sugars. As of July 2022, excise taxes on at least one type of SSB are applied at the national level in at least 108 countries worldwide (WHO 2023). 31 Table 5.6: GST Rates on Non-alcoholic Beverages in India, 2023–2024 Tariff item Description of goods GST rate Cess (%) (%) 2009 89 90 Tender coconut water other than prepackaged and labeled 0 0 2201 Water (other than aerated, mineral, purified, distilled, medicinal, 0 0 ionic, battery, demineralized, and water sold in sealed containers) 2201 Nonalcoholic toddy, neera including date and palm neera 0 0 2201 90 10 Ice and snow 5 0 2202 90 10 Soya milk drinks 12 0 2201 Drinking water packed in 20-liter bottles 12 0 2202 99 20 Fruit pulp or fruit juice–based drinks (other than carbonated 12 0 beverages of fruit drinks or carbonated beverages with fruit juice) 2009 89 90 Tender coconut water prepackaged and labeled 12 0 2202 90 30 Beverages containing milk 12 0 2201 Waters, including natural or artificial mineral waters and aerated 18 0 waters, not containing added sugar or other sweetening matter nor flavored other than drinking water packed in 20 liter bottles 2202 90 90 Caffeinated beverages 18 0 2202 91 00/ Other nonalcoholic beverages (other than tender coconut water 18 0 2202 99 90 and caffeinated beverages) 2202 10 All goods (including aerated waters) containing added sugar or 28 12 other sweetening matter or flavored 2202 Carbonated beverages of fruit drinks or carbonated beverages 28 12 with fruit juice 2202 10 10 Aerated waters 28 12 2202 10 20 Lemonade 28 12 2202 10 90 Others 28 12 Sources: Central Board of Indirect Taxes and Customs, Government of India, https://cbic-gst.gov.in/gst-goods-services- rates.html (accessed July 28, 2023). Note: GST = Goods and Services Tax. Product-specific data on GST collections are not available in India. The Central Board of Indirect Taxes and Customs (CBIC) records excise revenue data on aerated waters with and without added sugar in one group. All other items listed in chapter 22 are grouped as “others.” Since carbonates and juice alone constituted more than 94 percent of the sales value of soft drinks excluding bottled water, one can safely assume that a large part of these excise taxes comes from these products as the excise is ad valorem (a percentage of the 32 value). Moreover, the tax rates on mineral water and other noncarbonated soft drinks are comparatively lower, decreasing their contribution to the total tax share. Although the nominal excise tax revenue fluctuated during the years from FY2007/08 to FY2013/14, there has been a consistent increase in excise revenue from aerated waters from FY2014/15 onward (Figure 5.3). This is consistent with the increased excise duty rates on these products from FY2013/14, as shown. The revenue for FY2017/18 reflects only the revenue collected until June 2017, when the GST came into effect. Figure 5.3: Trends in Excise Tax Revenue and Duty Rate on Soft Drinks in India Excise revenue Duty rate (aerated drinks) Duty rate (other soft drinks) 30.00 25% 23.93 Excise revenue (Rs. billion) 25.00 20% Excise duty rates (%) 20.26 20.00 15% 14.60 15.00 10% 10.00 7.91 8.16 7.60 5.53 4.36 3.48 4.28 5% 5.00 2.81 0.00 0% 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18* Source: Directorate of Data Management, Central Board of Indirect Taxes and Customs, Government of India, 2019. 5.2.4 Salient Features of GST on Unhealthy Products Tax rates became more stable under the GST . Before the implementation of the GST, various state governments frequently adjusted the VAT rates on tobacco products. Over time, many states transitioned from lower to significantly higher VAT rates on these products leading up to the GST (John and Dauchy 2021). Additionally, central excise duties experienced annual increases on many products. For example, there has been an average annual increase of over 10 percent in central excise duties for cigarettes during the three years preceding the GST. While the variation in tax rates among states was not ideal under the pre-GST regime, the consistent upward trajectory of tax rates on unhealthy products —whether by states alone or by both states and the central government—was indeed desirable. The introduction of the GST not only established uniform tax rates across the nation but also ensured greater stability in these rates for a given product as the GST Council categorized goods and services into different tax slabs, including 5 percent, 12 33 percent, 18 percent, and 28 percent. The rates fixed for these products have remained the same since the introduction of the GST in 2017, which is not desirable. GST Council requires consensus to change tax rates: The alteration of tax rates within the GST framework necessitates consensus from the GST Council. This consensus is established by a majority of not less than three-fourths of weighted votes, with one-third of the total votes assigned to the Union and two-thirds to the states. Given the diversity of political parties governing different Indian states, which might differ from the party in power at the center, this consensus process is challenging at times. The Union government, having the exclusive authority to modify excise duty rates, has managed minor adjustments in the NCCD rates on tobacco products, albeit with marginal impact, since the introduction of GST. However, NCCD's contribution to total tobacco tax in India is under 10 percent. It is also worth noting that SSBs don't incur NCCDs. GST is an ad valorem tax: More than 50 percent of the taxes on cigarettes and bidis were in the form of specific excise duties prior to the GST. With the introduction of the GST, however, excise duties became insignificant. As a result, most of the taxes applied became ad valorem. As we already noted, when the tax is specific, externalities and internalities from the consumption of unhealthy products are not determined by the value but by the volume of consumption (WHO 2021b, 2022c). It is also known that compared to ad valorem taxes, specific taxes are more likely to be fully passed through to final prices or overshifted (price increased more than the tax increase warrants), leading to better health outcomes (World Bank 2023). More than 70 percent of countries have specific excises or a hybrid and ad valorem tax on cigarettes (WHO 2021b; Lane, Blecher, Ozer, et al. 2023). India’s indirect taxation system, on the other hand, transitioned from a mixed system with predominantly specific excise duties during the pre-GST era to a system with increasing share of ad valorem duties under the post-GST era. Under the current structure, only the NCCDs on bidis and cigarettes and a portion of compensation cess applied on cigarettes are specific. The entirety of taxes applied on bidis, smokeless tobacco, and SSBs under the GST are ad valorem. This may not bode well for the regulation of consumption of these unhealthy products. GST is not as discriminatory as a traditional excise duty on unhealthy products. Excise duties are inherently discriminatory and somewhat distortionary, therefore, enabling effective targeting of negative externalities and internalities to discourage harmful consumption, resulting in positive social welfare gains (Sassi, Belloni, and Capobianco 2013). Hence they are optimal as health taxes to regulate the consumption of unhealthy products (in fact, the term "health taxes" pertains specifically to excise taxes) (Lane, Blecher, Nagy, et al. 2023). Although India's GST structure incorporates certain discriminatory elements, such as higher GST rate tiers and a supplementary compensation cess on specific items, these mechanisms are not as effective as a separate excise duty. Since excise duty rates are normally applied at the ex-factory level, the subsequent GST rates gets applied on the excise inclusive price of the product, effectively inflating the tax burden on products further. Conversely, the GST and compensation cess function similarly to conventional sales taxes or VAT. Complexity of the tax structure increased for certain unhealthy products under the GST: Before the GST, as stated earlier, tobacco and SSBs had an excise duty by the Union and VAT by different states, while alcohol had both excise and VAT imposed by states. Excise itself consisted of basic excise duty and NCCD. 34 Post-GST, however, the excise duty along with NCCD applies, albeit at a much lower rate, while a GST as well as compensation cess is applied on many unhealthy products. For cigarettes in particular, the compensation cess itself has both specific and ad valorem components, as already discussed. Also, similar to the pre-GST system, the tiered tax structure, which allowed tax rates to vary by a variety of product characteristics, continues to exist even after the GST. All in all, especially for tobacco products like cigarettes, the tax structure under the GST has become far more complex post-GST compared to its pre-GST structure (John, Dauchy, and Goodchild 2019). The complexity in the tax structure was one of the reasons India’s cigarette tax score decreased to a low of 1.63 (out of 5) in 2018 compared to 2.75 in 2016 (Chaloupka et al. 2021). India's ranking in the overall cigarette tax score declined from 69th to 106th place out of 175 countries for which data were available during this period. A complex tax structure poses a bigger challenge to tax administration as well as effective increase of taxes, and it creates opportunities for legal tax avoidance by the industry, rendering tax increases ineffective. 5.3 TRENDS IN PRICE AND AFFORDABILITY OF UNHEALTHY PRODUCTS An effective health tax policy requires regular adjustments to keep up with both inflation and income growth, to reduce the affordability of these products for the final consumer. Price changes can impact the consumption of unhealthy products as there is a negative relationship between price and consumption. Income, on the other hand, has a positive effect in increasing purchasing power and thereby impacting consumption decisions. When per capita income rises in a country, small price increases may not reduce people’s demand for unhealthy products. For the demand to be affected, the negative price impact should be greater in magnitude than the positive income effect. Hence tax-induced price increases must be higher than income increases for the tax policy to be used as an effective tool to reduce consumption. There are many ways to measure the affordability of unhealthy products, one of the most popular and preferred methods is to use a Relative Income Price (RIP) (Blecher and van Walbeek 2004, 2009). The method calculates the share of per capita GDP required to purchase a certain predefined volume of a given unhealthy product. For instance, one can measure the share of per capita GDP required to purchase 100 packs of cigarettes, 100 cans of beer, or 100 liters of SSBs (John and Dauchy 2021; John, Tullu, and Gupta 2022; Blecher et al. 2018). The higher the value of RIP, the less affordable the product, and vice versa. Alternative methods used in the literature to measure affordability include (i) comparison of the price index of the unhealthy product relative to the overall price index or the per capita GDP (John et al. 2010); and (ii) comparison of the prices of the unhealthy product relative to monthly per capita expenditures and wages instead of per capita GDP (Sharma et al. 2022). Often these alternative methods are used when actual retail price data on the product are not available. In India, product-specific Consumer Price Index (CPI) and Wholesale Price Index (WPI) are available for different commodities at a certain level of disaggregation. For example, monthly WPI on select commodities is available from the Ministry of Commerce and Industry. The Labour Bureau, under the Ministry of Labour and Employment, historically provided retail price data on different products, which were also used to construct the CPI. However, currently only monthly CPI data for these products are available rather than the actual retail prices, which were used to construct the same CPI. In the absence of retail price data, this report will construct 35 an average unit price from the annual retail volume and values reported by Euromonitor (Euromonitor International 2023a, 2023b, 2023c). One advantage of such an average price would be that it performs more like a weighted average price and is less likely to be subject to measurement errors as are individually reported unit values collected from household surveys. The next sections of this report use an estimation of affordability (for tobacco products, alcohol, and SSBs) as a ratio of annual average unit prices for a certain fixed quantity of the product as derived from the Euromonitor to per capita GDP, as obtained from the Reserve Bank of India (RBI) (RBI 2023a). 5.3.1 Price and Affordability of Tobacco Products The existing evidence examining the affordability of tobacco products in India generally shows that cigarettes, bidis, and SLT have become increasingly affordable, with some variation across states and population groups (John and Dauchy 2021; Sharma et al. 2022; Goodchild et al. 2020; Guindon et al. 2019; Rout and Parhi 2020). Although the scope of coverage, time, population subgroups, and products these studies considered for the analysis varied, most, if not all, of them, used somewhat similar methods to estimate the affordability. For example, one study examined the impact of GST on the affordability of different tobacco products and concluded that, between the years FY2007/08 to FY2018/19, cigarettes, bidis, and SLT became increasingly affordable in India (John and Dauchy 2021). Bidis were found to be nine times more affordable than cigarettes. It also found that the GST has further contributed to the increase in the affordability of cigarettes and SLT, while bidis remained highly affordable without significant alteration post-GST (John and Dauchy 2021). Another study concluded that from 2007–08 to 2017–18 affordability of bidis and cigarettes remained unchanged while that of SLT increased at the national level, with variations in affordability across different Indian states for each product (Goodchild et al. 2020). A study using slightly older data had also shown that both cigarettes and bidis have become more affordable since year 2000, once rising income is taken into account (Guindon et al. 2019). One study that used an alternative methodology found that affordability remained neutral in the post-GST regime for cigarettes (Rout and Parhi 2020). A recent study that examined affordability among different types of workers in India during 2011–12 to 2018–19 found affordability remained stable for casual workers but slightly decreased for cigarettes and bidis among regular workers, while remaining constant for SLT (Sharma et al. 2022). The same study finds that all products became more affordable for backward caste groups than for regular workers. Based on the Euromonitor data, cigarettes and SLT have become more affordable between 2013 and 2022, with decreasing RIP values (Figure 5.4). The estimated average price for a pack of 10-stick cigarettes was Rs. 120, and for a 100g pack of SLT, it was Rs. 97 in 2022. In 2013 a 6.9 percent of per capita GDP would purchase 100 packs of cigarettes, while in 2022 to purchase the same only 6.4 percent of per capita GDP would be necessary. Similarly, the per capita GDP share for purchasing 100 packs of SLT of 100g decreased from 7.5 percent in 2013 to 5.1 percent in 2022. From the year 2013 leading up to 2017, when the GST got introduced, cigarettes were becoming less affordable, whereas affordability started increasing post-GST from 2018 onward. The affordability of SLT was already on a rising streak and continued to rise as the years passed post-GST. This is consistent with the decreased sales value of SLTs we observed earlier in the report. This finding is consistent with the other studies in the Indian literature as described above, although the affordability here was constructed using average unit prices obtained from the Euromonitor as against the actual retail 36 prices. A similar analysis of retail prices of local brand cigarettes obtained from Mumbai and Delhi as available from the Economist Intelligence Unit (EIU) shows slightly decreasing affordability (Economist Intelligence Unit 2023). Figure 5.4: Trends in the Affordability of Cigarettes and Smokeless Tobacco in India Cigarette Smokeless tobacco Cigarettes (EIU) 10% Relative income price (RIP) 9% 8% 7% 6% 5% 4% 3% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Estimated using data from Euromonitor & RBI (Euromonitor International 2023c; RBI 2023a) Note: RIP estimates the percentage of per capita GDP required to purchase 100 packs of cigarettes of 10 sticks each or 100 packs of smokeless of 100 grams each. Falling RIP indicates rising affordability. 5.3.2 Price and Affordability of Alcohol Products Given that each state has complete discretion in setting taxes, it will not be surprising to find significant price variability across the country on different alcohol products. Unlike in the case of tobacco products, there have been no studies in India that specifically examined the affordability or its trends of alcoholic products. For instance, while a 1 liter local brand beer costs Rs. 280 in Delhi, the same costs Rs. 344 in Mumbai according to data from EIU (Economist Intelligence Unit 2023). Using aggregate volumes and values to derive prices/unit values based on Euromonitor data, the report estimates that the average unit price per liter in 2022 was Rs. 307, Rs. 128, Rs. 231, Rs. 454, and Rs. 623 for alcohol (total), beer, RTDs, spirits, and wine, respectively, at the national level. Alcohol products have become increasingly affordable in India over the last 10 years. For instance, while in 2013 6 percent of per capita GDP could purchase 10 liters of alcohol, the same could be purchased for as little as 2 percent in 2022—a decline of 67 percent (Figure 5.5). Similarly, the percentage decline required per capita GDP share for the purchase of beer ranged from 63 percent to 74 percent for RTDs, spirits, and wine during this time. An analysis of RIP based on EIU data from Mumbai and Delhi show similar trends: 37 these products are becoming increasingly affordable in these cities over the past 10 years. While many states have increased taxes on alcohol products during this time, the tax increases have not been sufficient to compensate for rising incomes as evidenced by the increasing affordability across the alcohol product range. The trends of affordability have not been affected by the introduction of the GST since alcohol has been kept out of the scope of GST in India. The steady rise in affordability of alcohol is quite consistent with the 3 percent decline of sales value in real terms over the past 10 years in India despite a 54 percent growth in volume as demonstrated in section 3.2 of this report. 38 Figure 5.5: Trends in the Affordability of Alcohol Products in India, 2013–2022 a) All alcohol products, nationwide* b) Selected alcohol products, Mumbai and Delhi** 14% 25% 12% 20% Relative income price (RIP) Relative income price (RIP) 10% 15% 8% 6% 10% 4% 5% 2% 0% 0% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Alcohol (total) Beer RTDs Spirits Wine Wine Beer Liqueur Source: Estimated using data from Euromonitor & RBI (Euromonitor International 2023a; RBI 2023a). Notes: RTDs = Ready to Drink (beverages). * RIP estimates the percentage of per capita GDP required to purchase 10L alcohol. Falling RIP indicates rising affordability. ** RIP for 10 bottles of 750ml wine, 1L beer, and 1L liqueur. 5.3.3 Price and Affordability of SSBs The available evidence suggests a steady increase in affordability for all SSBs in India over the last decade (Figure 5.6). For instance, a recent study used retail selling prices across the country to estimate the affordability and its trends for popular SSB brands in India (such as Coca-Cola, Pepsi, and Thums Up) (John, Tullu, and Gupta 2022). The authors estimated that there has been an annual average decline of about 6.8 percent in the RIP of SSBs from 2006–07 to 2018-19. Based on Euromonitor data, the estimated average unit price per liter was Rs. 47, Rs. 38, Rs. 174, Rs. 59, Rs. 286, and Rs. 74 for soft drinks (total), carbonates, concentrates, juice, energy drinks, and sports drinks, respectively, in 2022. The estimates of RIP based on this data suggest a steady increase in affordability for all SSBs evidenced by a consistently declining RIP. This trend has not been affected at all despite the introduction of the GST in 2017 and the inclusion of SSBs in it. An analysis of RIP based on EIU data from Mumbai and Delhi shows similar trends: SSBs such as Coca-Cola and packaged juice are becoming increasingly affordable in these cities when considering a 10-year period. 39 Figure 5.6: Trends in Affordability of Selected Sugar-Sweetened Beverages in India, 2013– 2022 a) Selected SSBs, nationwide* b) Selected SSBs, Mumbai and Delhi* 10.0% 12.0% 9.0% 10.0% 8.0% Relative income price (RIP) Relative income price (RIP) 7.0% 8.0% 6.0% 5.0% 6.0% 4.0% 4.0% 3.0% 2.0% 2.0% 1.0% 0.0% 0.0% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Soft drinks (total) Carbonates Juice Sports drinks Coca-cola Packaged juice Source: Estimated using data from Euromonitor, EIU & RBI (Euromonitor International 2023b; Economist Intelligence Unit. 2023; RBI 2023a). Notes: SSBs = Sugar-sweetened beverages. RIP estimates the percentage of per capita GDP required to purchase 100L SSBs. Falling RIP indicates rising affordability. 5.4 EMPIRICAL EVIDENCE AROUND HEALTH TAXES IN INDIA Nearly all unhealthy products in India examined here have become increasingly affordable over the past 10 years. While taxes may have increased on many of these products, one of the prime reasons affordability continues to grow is rising incomes. There has been 46 percent cumulative growth in per capita GDP in India over the past 10 years in constant 2012 prices (RBI 2023a). Tax increases may not have been sufficiently higher to compensate for this income growth. For health taxes to be effective, it is important that tax-induced price changes have the effect of reducing consumption of unhealthy products. This can be empirically verified by estimating price elasticity of demand for different unhealthy products. Several studies have estimated the price elasticity of demand for different tobacco products in India, most of them estimate own-price elasticity coefficients to be in the range of -0.4 to -1.0. Most, if not all, of these studies, have estimated price elasticity using household consumer expenditure surveys by the National Statistical Office (NSO). One study, published in 2008, estimated own-price elasticity of cigarettes to be -0.4 and that of bidis and leaf tobacco to be roughly -0.9 (John 2008). A 2010 study estimated that if the tax rate on bidis increases from 9 percent to 40 percent of the retail price and on cigarettes from 38 percent to 78 percent of the retail price, 18.9 million lives will be saved in the country (John et al. 2010). More recent studies, using largely similar methods but more recent consumer expenditure surveys have estimated that tobacco products such as bidis, cigarettes, and SLTs negatively respond to price changes in India, with own-price elasticity coefficients ranging from -0.3 to -0.95 depending on the product type and socioeconomic status (SES) 40 categories (Selvaraj, Srivastava, and Karan 2015; Guindon et al. 2011). A study specifically focusing on youths in India also found that higher prices can be an effective deterrent to youth tobacco use, irrespective of the form of tobacco, with own-price elasticity coefficients ranging from -0.4 to -2.7, depending on the product (Joseph and Chaloupka 2014). Another study examined the impact of price on tobacco use initiation and cessation using 2017 data from GATS and found that price increases are a statistically significant deterrent to initiation of smoking and SLT and increase the probability of quitting both smoking and SLT use. It estimated the price elasticity of initiation, on average, as -0.0236 and -0.000428 for smoking and SLT, respectively, while the price elasticity of quitting was estimated to be 0.0218 and 0.0026 for smoking and SLT, respectively (Dauchy and John 2022). This evidence from India is consistent with the international literature, which shows relatively higher own-price elasticity for tobacco products in LMICs. The available evidence on price elasticity of demand for alcohol products in India is limited. One of the first studies, using household survey data from 1994,10 estimated that for moderate to heavy drinkers the own- price elasticity was -1.0 among individuals of 15–25 years and -0.5 for individuals aged 25 years and above (Mahal 2000). Another study, using survey data from 2014 covering five Indian states (Andhra Pradesh, Kerala, Madhya Pradesh, Maharashtra, and West Bengal), estimated that the own-price elasticity ranged from -0.14 for spirits to -0.46 for country liquor in India (Kumar 2017). The authors also found rural drinkers to be relatively more price responsive compared to their urban counterparts (Kumar 2017). Another study using data from six Indian states (National Capital Territory [NCT] Delhi, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra Odisha, Sikkim) estimated the own-price elasticity of demand for IMFL varying between -0.1 to - 0.8 for different states with the exception of a very low-price elasticity of -0.007 for Delhi (Gupta et al. 2022). The overall price elasticity was estimated at -0.057, implying IMFL consumption was highly inelastic (Gupta et al. 2022).80 The study also estimated tax elasticity,11 which showed that a 10 percent increase in tax would result in a 1.4 percent reduction in consumption (Gupta et al. 2022). Due to the highly inelastic nature of IMFL consumption, this study concluded that a 10 percent tax increase would have the effect of increasing tax revenue by about 8.4 percent. The studies estimating price elasticities for alcohol are not representative of the entire country nor econometrically robust, due either to the limited geographical scope of data used or to the methods not accounting for household survey design issues such as measurement errors and usage of unit values as proxies for prices as addressed in other studies that use household expenditure surveys to estimate price elasticities (John et al. 2023). As a result, the variability between the estimates of own-price elasticity coefficients is quite large between different studies. Only two studies in India estimated the own-price elasticity of SSBs using nationally representative household consumer expenditure surveys. The own-price elasticity estimates from both studies were quite similar: the 10The empirical data in this study were derived from a 1994 survey conducted by the National Council of Applied Economic Research (NCAER) in 15 major Indian states and the northeastern Region, focusing on rural households. 11In this study, tax elasticity was defined as the proportional change in alcohol consumption resulting from a proportional change in tax. This measure is useful for drawing conclusions about the potential impact on tax revenue when the tax is increased. 41 most recent study, which used 2011 –12 data, estimated the own-price elasticity for SSBs and juice at -0.94 and -0.55, respectively. The study also found that rural households are relatively more price responsive than their urban counterparts, and that the elasticity varied by income groups with own-price elasticity for SSBs being -1.03, -0.93, and -0.83 for low-, middle-, and high-income households (John, Tullu, and Gupta 2022). The first study, which used 2009 –10 data, estimated that if SSB consumption continued to increase linearly following secular trends, a 20 percent SSB tax was projected to reduce overweight and obesity prevalence by 3.0 percent and type 2 diabetes incidence by 1.6 percent among various Indian subpopulations from 2014 to 2023 (Basu et al. 2014). Both studies used the consumer expenditures surveys (2009–10 round and 2011–12 round) by the NSO. Generally, the available evidence in India indicates a negative relationship between the price and consumption of all unhealthy products. This is in accordance with international literature and underscores the potential of using health taxes as a tool to regulate consumption of these products. Although there are variations, most studies conclude that these unhealthy products are inelastic with own-price elasticity of less than 1. This implies that while tax-induced price increases can reduce the consumption of unhealthy products, they can also increase tax revenue from these products. In other words, it is safe to conclude based on the evidence from India that health taxes can be a clear win-win. Annex I presents a review of the evidence on broader issues related to the production and consumption of unhealthy products in India. 42 6 HEALTH TAXES IN INDIA: CHALLENGES AND OPPORTUNITIES Taxing unhealthy products can be complex due to the diverse range of product varieties stemming from manufacturing processes or input types. This challenge is particularly evident in India. For example, tobacco consumption encompasses various forms, including different smoked and smokeless tobacco items. Similar diversity is seen in SSBs and alcohol, both featuring a wide array of options for the consumers in the market. For example, SSBs may differ in sugar content and types, while alcohol products can vary significantly in alcohol concentration based on production methods. The extensive product variety within each category creates ample opportunities for consumers to opt for cheaper alternatives or switch between different product offerings. Hence, it is crucial for tax policies to limit substitution opportunities and target an overall reduction in the consumption of these unhealthy products. Another challenge is the division of legislative power on taxation of unhealthy products between the GST Council and state governments. As pointed out in earlier sections, while the taxation authority on both tobacco and SSBs rests with the GST Council (consisting of the Union finance minister and representatives from all states and Union Territories), that authority for alcohol is entirely the domain of state governments. Nevertheless, India’s GST along with the Union government’s ability to impose excise duties presents a good opportunity to rationalize health taxes and make tax rates on unhealthy products uniform across the country. 6.1 CHALLENGES TO REFORM HEALTH TAXES IN INDIA Any attempt to reform health taxes in India would need to address the significant issues within the current indirect tax system. As previously stated, the introduction of GST in 2017 completely transformed India's indirect taxation system, significantly affecting the taxation of various products, especially tobacco and SSBs. This shift has brought about new challenges in taxing these products. Alcohol taxation, although currently not under GST, presents its own set of challenges. This section discusses the challenges within the existing indirect tax system and how they affect the efforts to reform health taxes in the country. Undesired stability of tax rates: As mentioned earlier, the GST rates for unhealthy products have remained the same since the introduction of GST in 2017. This is in contrast to the pre-GST system, where taxes were regularly changed either at the state or the Union level or both. While stability in tax rates may be desirable for a variety of goods and services, the same is not advised for unhealthy products whose tax rates should be increased over time to make them less affordable and thereby discourage their consumption. Had the GST Council maintained the previous three years' rate of tax increase after the introduction of GST, cigarette taxes would have experienced at least a 50 percent additional tax hike since GST. However, over the past six years since GST was introduced, the GST rates on cigarettes have remained unchanged, with only the NCCD applied on cigarettes seeing some increases during this period. Recent evidence has shown increasing affordability of tobacco products and SSBs post GST, as previously stated (John and Dauchy 2021; John, Tullu, and Gupta 2022). 43 The consensus within the GST Council: As noted earlier, the GST Council requires a consensus to revise rates, which can be challenging to achieve under India's federal democratic system, where the center and certain states are governed by different political parties, sometimes at odds with each other. It is imperative that the GST Council establish mechanisms to enable dynamic changes in tax rates on unhealthy products in the interest of public health. An example of such a mechanism could involve regular adjustments to tax rates, aiming to reduce affordability. This would necessitate a comprehensive revision of overall tax rates on unhealthy products, exceeding the combined impact of inflation and GDP growth in the country. Near absence of excise duties after the overhaul of indirect taxes: Although excise duties on tobacco and SSBs were subsumed into the GST, it was reinstated for only tobacco products during the 2019 –20 Union budget, albeit at a nominal level. As previously mentioned in this report, despite this reinstatement, the share of excise tax (including NCCDs) within total tobacco taxes experienced a significant decrease from the pre- GST era to the post-GST period: the percentage dropped from about 54 percent to 8 percent for cigarettes, 17 percent to 1 percent for bidis, and 59 percent to 11 percent for smokeless tobacco products. Currently, SSBs do not have any excise duties. In contrast, varying excise duty rates on alcohol persist across different states. Furthermore, the unilateral authority of the center to change excise duty rates contrasts with the consensus requirement of the GST Council for altering rates under the GST. This dynamic renders the modification of excise duties more viable than the adjustments of nonexcise duties on these products. This distinction highlights the significance of maintaining a substantial excise share in the overall duties imposed on unhealthy products, as was the case in the pre-GST era. Its absence in the current indirect tax regime on SSBs and nominal presence in the case of tobacco products presents a challenge for increasing taxes on unhealthy products. Increased reliance on ad valorem taxes: As previously mentioned, the entirety of taxes applied on bidis, smokeless tobacco, and SSBs under the GST as well as several taxes on alcohol across different states in India are ad valorem. This does not bode well for the regulation of their consumption. Since the very nature of GST is ad valorem for all goods and services, it is important to have non-GST elements in the indirect tax structure on unhealthy products, which can be applied as specific duties and act as better means to regulate consumption of these products. This once again underscores the importance of having an excise duty outside of the GST for taxing unhealthy products. Increased complexity of the taxation structure: This report finds that the complexity of the tax structure increased for certain unhealthy products such as cigarettes under the GST. A complex tax structure poses a bigger challenge to tax administration as well as an effective increase of taxes, and it gives rise to opportunities for legal tax avoidance by the industry, rendering tax increases ineffective. Absence of consistent tax rates across product types: Article 6 Guidelines to the WHO Framework Convention on Tobacco Control (FCTC) recommends that “all tobacco products should be taxed in a comparable way as appropriate, in particular where the risk of substitution exists” (WHO 2017b). In India, taxes vary not only between products such as bidis and cigarettes, but they also vary within cigarettes, for instance, between cigarettes of different length. Similarly, while a compensation cess under the GST is applied on cigarettes and smokeless tobacco, the same is not applied on bidis —the most consumed smoked tobacco 44 product in India. As there are possible substitution opportunities between tobacco products, and all tobacco products are, by and large, equally harmful, there is no economic or public health rationale to distinguish these products by different tax rates. Moreover, uniformity in taxation across tobacco products will significantly simplify tax administration and reduce opportunities for legal tax avoidances. Regarding SSBs, the application of tax rates under the GST is not linked to the presence or amount of sugar content. For example, all aerated and carbonated drinks, including some with zero-sugar, are subject to the highest GST rate of 28 percent, along with a 12 percent compensation cess. Similarly, juice, regardless of added sugars or sweeteners, is taxed at a flat 12 percent GST rate and no compensation cess. From a public health perspective, it will be more effective to apply a higher tax on soft drinks with higher added sugars and vice versa. Implementing a tiered tax rate based on sugar content could encourage industry reformulation for lower tax tiers although it may potentially complicate tax administration (WHO 2022c). Alternatively, a uniform tax rate may be applied to all SSBs to simplify tax administration. Similarly, the taxation of alcohol varies not only among states but also within the same states for different product ranges. Since many alcoholic products can be substituted for one another and often differ in terms of alcohol concentration, a rational and public health –oriented taxation approach should aim at decreasing total ethanol consumption for the end user. The wide variety and characteristics of available alcohol product ranges in the market pose a significant challenge to devising tax policies. No automatic inflation adjustment: India’s GST, which is applied to tobacco and SSBs, is an ad valorem tax. Indirect taxes applied on alcohol beverages at state level are also often ad valorem in nature. An advantage of the ad valorem tax is that since the tax is imposed as a percentage of the product's value, it can keep up with inflation. Nonetheless, such taxes have a drawback: they may not effectively curb consumption since consumers can switch to cheaper options while maintaining the same consumption levels. Therefore, specific taxes, regularly adjusted for inflation, are more effective in regulating the consumption of unhealthy products. In many cases specific taxation can be more effective for relatively cheaper products, while ad valorem taxes may be better for products that are naturally expensive due to high input costs. Over 70 percent of countries apply specific excises or a combination of specific and ad valorem taxes on cigarettes (WHO 2021b; Lane, Blecher, Ozer, et al. 2023): Out of these, 32 countries including Australia, Canada, France, Italy, Mexico, Philippines, South Africa, Russia, and the United Kingdom have automatic adjustments of inflation, often on the excise duties. Several countries, such as Belgium, French Polynesia, Mexico, and Mauritius, apply specific excise taxes on SSBs while many others apply ad valorem rates (WHO 2022c). A variety of tax types, including ad valorem, specific, or mixed, are imposed on alcoholic beverages across the world. While the ad valorem rates are based on the product's value, specific taxes on alcohol may be determined by the beverage's volume (Belgium, Brazil, and Ukraine, for instance) or alcohol content (Australia, Denmark, South Africa, and United Kingdom on certain alcoholic products, for instance). In situations where specific taxes are applied, it is important to revise these regularly to keep up with inflation as inflation erodes the value of specific taxes. In countries such as India where annual economic growth has been relatively higher, specific taxes that are not adjusted for inflation and income growth could result in increasing product affordability over time. Currently, India's GST employs a specific tax solely on the NCCD portion of taxes for cigarettes and bidis, along with the compensation element on cigarettes. Meanwhile, an ad valorem 45 rate is employed for all other tobacco products and SSBs. As the compensation component has a substantial share in the total taxes on cigarettes in India, the lack of its revision in the past six years has led to significant erosion in its value. Nonstandard product packaging: The lack of standardized packaging can often diminish the effectiveness of taxation. Studies in India reveal that despite smokeless tobacco products having equal or higher tax burdens compared to cigarettes, their consumption remains high while cigarette consumption has notably decreased. This is partly due to the very low unit prices of retail pouches for smokeless products. Many of these products are sold in pouches of less than 10 grams, some even as small as one to two grams. Consequently, their unit prices remain extremely low despite a high tax rate. Even significant tax increases don't significantly affect the final retail price. To make the taxes impactful and the products less affordable, it is crucial for them to be sold in a minimum pack size, like 100 grams, to ensure the retail price is at least as high as a pack of cigarettes. Only then can taxation truly be effective. The absence of mandated standardized packaging for smokeless tobacco products to maintain a minimum retail price floor poses another challenge in increasing taxes further on these products, often rendering such tax hikes ineffective. A similar case can also be made for SSBs and alcoholic beverages, where the industry markets child-friendly mini-bottles and cans that are more affordable for children, or miniature bottles of alcohol with low unit prices for price-conscious consumers. Non-inclusion of alcohol in the GST: The fact that alcohol taxation is not part of the GST, with state governments having the exclusive authority to license production and tax its sale, leads to a wide variation of tax rates, which can potentially lead to interstate smuggling. 12 The noninclusion of alcohol in the GST may be preventing a nationwide uniform tax increase on alcoholic beverages; therefore, the inclusion of alcohol products in the GST is critical. Incorporating alcohol taxation within India's GST framework offers numerous advantages: (a) The current lack of uniform regulations across states creates complexities for alcohol manufacturers and sellers, hindering seamless production and distribution processes; (b) The divergent regulations create opportunities for illicit alcohol trade to thrive, as evidenced by a WHO report indicating that approximately 46 percent of alcohol consumption in India is sourced from illegal production (WHO 2018); (c) By bringing alcohol under the GST, regulatory hurdles would be streamlined, contributing to simplified processes and curbing tax evasion; and (d) This move would result in increased government revenue and enhanced tax administration, ultimately fostering more effective and efficient alcohol regulation across the country. Coordination among different ministries: Conscious regulation of the consumption of unhealthy products like tobacco, alcohol, and SSBs requires coordinated efforts from different government ministries and industry bodies. Regulation of tobacco, for instance, warrants cooperative involvement from the Ministries of Agriculture, Commerce, Finance, Industry, Labour, and Rural Development. However, priorities from other ministries may favor production, employment, quality improvement, and price support, often at odds with 12Individuals or businesses exploit the tax rate disparities by purchasing alcohol from low-tax jurisdictions and transporting it to states/UTs with higher taxes, effectively undermining the higher taxes imposed in certain states. 46 reducing consumption (Ullekh 2013). The Indian Tobacco Board, under the Ministry of Commerce and Industry, promotes domestic tobacco varieties and industry development (Bhojani, Venkataraman, and Manganawar 2013). Similar issues, at varying degrees, persists in the case of alcohol regulation at the state level as well. These conflicting priorities imply that the Ministry of Finance (MoF) might not be able to independently increase taxes on unhealthy products without considering interests and input from other ministries. Political economy factors hindering health tax reforms: Divergent stakeholder interests can obstruct the implementation of significant tax reforms on unhealthy products. For example, government ownership stakes in certain tobacco companies through public sector undertakings create conflicts of interest. Similarly, political donations from the tobacco industry may influence decision-making (John, 2019). Additionally, industry bodies representing manufacturers of unhealthy products can shape public policy in ways that weaken regulatory efforts. These competing interests pose significant challenges to health tax reforms. 6.2 KNOWLEDGE GAPS The available body of research on this subject is relatively more substantial for tobacco, although still limited compared to international literature, and comparatively less so for SSBs and alcohol. Some key knowledge gaps and areas to be further explored to support future reforms at Union and state levels are listed below. The research landscape on the economics of unhealthy product use in India faces a significant challenge: insufficient data. Key issues include: (i) Scarcity of comprehensive data on consumption of unhealthy products; (ii) Limited data on economic costs, such as treatment expenses for diseases caused by these products; (iii) Lack of data on factors driving consumption, including pricing, marketing strategies, and policies; and (iv) Fragmented data on product-specific tax rates and revenues, making comprehensive analysis difficult. The absence of consolidated product-specific tax rate and revenue data for all unhealthy products . Since the introduction of GST in 2017, data for tobacco and SSB tax revenues are unavailable in the public domain. For alcohol, tax revenue data are only available at the state level, and even then, comprehensive data for several states are inaccessible. This lack of centralized information hinders effective study and policy making on the economic aspects of unhealthy product consumption. One of the major impediments to extensive research on taxation of unhealthy products in India is the lack of nationally representative time series data on the consumption and prevalence of different unhealthy products. Most research uses cross-sectional data, which often do not provide individual-level consumption information. This is crucial for analyzing consumption patterns, especially since these products are often not legally accessible to children. National surveys like GATS and GYTS provide individual-level tobacco consumption data but at intervals of over six years. Similar data for alcohol and SSBs do not exist. NFHS provides some data but only for specific age groups and items, and also at five-year intervals. Neither NFHS nor GATS provide detailed consumption quantities, making it challenging to model price responsiveness. 47 Nationally representative household expenditure data are mainly available through the Consumer Expenditure Survey (CES) and Consumer Pyramid Household Survey (CPHS). The CES, conducted by the National Statistical Office (NSO), covers a variety of unhealthy products, recording both quantity and expenditure, which can be effectively used to estimate price elasticities as done in many countries including India (John, Tullu, and Gupta 2022; John 2008; Selvaraj, Srivastava, and Karan 2015). However, the most recent CES data are from 2011–12 due to the suppression of the 2017–18 round. The CPHS, by the Centre for Monitoring Indian Economy (CMIE), provides updated time series data but only for expenditures on a few unhealthy products and does not include consumption quantities. Furthermore, CPHS's representativeness has been criticized for underrepresenting women, children, and impoverished households (Somanchi 2021). There is an urgent need for accurate surveillance data on the consumption of unhealthy products to generate evidence for effective public health policy making. This scarcity of data is a substantial hindrance to design and implementing policies aimed at curbing the consumption of these products. The analytical gap extends to several vital dimensions: - The assessment of health taxes' impact on unhealthy product consumption, encompassing potential employment effects: For example, while price elasticity estimates exist for tobacco products and SSBs across different SES groups, similar data for alcohol in India are lacking. Existing estimates on tobacco are outdated. Up-to-date own-price and income elasticity estimates for various socioeconomic groups are needed to make tax policies more effective. Additionally, tax hikes that reduce bidi consumption may impact low-skilled laborers, especially in states with substantial bidi rolling employment. Declining demand for raw tobacco could also affect tobacco farmers. Detailed examination is required to assess these effects. - An in-depth exploration of the health consequences and economic repercussions of consuming unhealthy products: Despite widespread recognition of the health risks of consuming unhealthy products, India-specific data on disease and mortality risks linked to these products are lacking. This information is crucial for calculating the economic costs of consumption. While some estimates exist for the economic burden of tobacco, such data are limited for alcohol and absent for SSBs. - Analysis of the price and nonprice determinants influencing the consumption of unhealthy products: Consumption of unhealthy products is influenced by factors like pricing, income, SES, education, and religious beliefs. Recognizing this is essential for holistic policy development. While some India-specific research exists for tobacco, there is a significant scarcity of similar studies for alcohol and SSBs. - Evaluation of the design and execution of tax policies targeting unhealthy products: Several modeling studies have explored the impact of tax hikes on the consumption of unhealthy products in India. However, research is lacking on how tax structure changes have influenced consumption patterns and tax revenue. Assessing whether unhealthy product taxes need an overhaul is crucial. For example, alcohol taxes could target ethanol content, and SSB taxes could focus on sugar content. Understanding these dynamics is vital for developing effective tax policies. 48 - Examination of industry strategies aimed at subverting public health policies regulating these products and promoting their consumption: In many countries, research on industry interference by tobacco, alcohol, and SSB stakeholders in public policy is comprehensive. However, in India, this area is largely unexplored. Understanding how these industries undermine public health policies is crucial, and academic research is needed to highlight these issues. - The study of illicit trade networks involved with unhealthy products like tobacco and alcohol: The industry often raises concerns about increased taxation leading to illicit trade. In the absence of academic research, the industry rely on estimates of illicit trade to oppose tax hikes. It is crucial to monitor illicit trade and investigate whether tax increases actually fuel it or if other factors, like administrative inefficiency and compliance, play a larger role. While some research exists on this for tobacco in India, similar studies are lacking for alcohol and SSBs. - Exploration of diverse supply-side issues tied to unhealthy products : It is crucial to examine both demand and supply aspects when regulating unhealthy product consumption. This includes factors like farming, production, employment, trade, and advertising within the supply chain. Comprehensive understanding of both sides is vital for effective regulation. However, such studies are scarce for all unhealthy products in India, with only limited research available for tobacco. The dearth of research on these multifaceted issues presents a formidable barrier to devising effective policies for reducing the consumption of unhealthy products. 6.3 POLICY PRIORITIES Addressing the issue of unhealthy product consumption in India is not solely a matter of public health policy. Implementing higher taxes on unhealthy products involves navigating conflicting interests within government and industry and requires collaboration across state governments. The challenge is a technical one, and it is also rooted in public and private sector priorities. Considering these competing interests is essential for designing effective policies and taxation strategies. Development partners must collaborate with national and state governments to regulate unhealthy product consumption, including taxation. The policy priority areas to reform health taxes in India are, as follows: a) Devising Effective Tax Structures: Current taxation systems for unhealthy products in India are ineffective and misaligned with international standards. Improving these tax regimes can have a significant impact. Technical assistance can help create a tax structure with a greater specific excise component and a smaller ad valorem component to reduce product affordability. Additionally, it can aid in designing automatic inflation adjustments on health taxes, leveraging international experiences. b) Exploring introduction of specific health taxes to replace existing indirect taxes on unhealthy products: Global experiences can provide technical expertise to shape alcohol taxes based on ethanol content and SSB taxes based on sugar content. This approach aims to reduce substitution 49 and encourage consumers to choose less harmful options. With the GST compensation cess on tobacco and SSBs expiring on March 31, 2026, there is an opportunity to replace it with an equivalent health tax. c) State-level analysis of alcohol tax structure: Detailed state-level studies to assess existing systems of taxing alcohol and their relative merits and drawbacks. This will help to pinpoint and choose the characteristic features of successful models in terms of tax administration, revenue generation, and consumption regulation. d) Enhancing tax compliance and administration: Leveraging international experiences, which assists in the establishment of systems to track and ensure tax compliance for unhealthy products, can strengthen revenue generation and enforcement. e) Establishing a comprehensive surveillance database: Similar to the Global Adult Tobacco Survey (GATS) and the Global Youth Tobacco Survey (GYTS) for tobacco, there is a pressing need to gather analogous data on alcohol and SSBs. Offering financial and technical support to the government in this endeavor would be invaluable for informed policy making. f) Regulating marketing practices: Collaborating on restrictions related to advertising, sponsorship, and product placement in public spaces for unhealthy products can help protect public health. Providing technical guidance in these areas is pivotal. g) Promoting access to healthy alternatives. Improving access to healthier alternatives for unhealthy products requires technical expertise. This can encompass strategies such as subsidizing healthy foods. h) Facilitating alternative employment opportunities for those involved in the production of unhealthy products: This may be in the form of assisting with crop diversification for tobacco farmers or helping unskilled bidi workers obtain gainful employment in other sectors, for example. 50 REFERENCES Allcott, H., B. B. Lockwood, and D. Taubinsky. 2019. “Should We Tax Sugar-Sweetened Beverages? 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Global Report on the Use of Sugar-Sweetened Beverage Taxes, 2023. Geneva. https://iris.who.int/handle/10665/374530. Accessed December 5, 2023. World Bank. 2022. “Health Tax.” Washington, DC. https://www.worldbank.org/en/programs/the-global- tax- program/health-tax. Accessed September 14, 2023. 58 ANNEX I: ADDITIONAL EVIDENCE There have also been studies that looked at different aspects of health taxes such as the effect on employment and illicit trade. The industry frequently expresses concerns about potential employment losses resulting from increased health taxes. However, numerous international studies have consistently shown that this argument is often used as a tactic to dissuade policy makers from raising taxes. Econometric studies on the employment in the tobacco sector (WHO 2021b; NCI and WHO 2016) show that in most countries tobacco control policies would have an overall neutral or positive effect on overall employment. In the few countries that depend heavily on tobacco exporting, global implementation of effective tobacco control policies would produce a gradual decline in employment in the tobacco sector. Similarly, empirical evidence from independent studies reveals that the implementation of SSB taxes does not lead to changes in employment rates primarily because any job losses in the taxed sector are usually balanced out by job gains in other nontaxed sectors (WHO 2022c). A similar study on alcohol taxes in the United States (Wada et al. 2017) showed a 5-cent per drink additional excise tax on alcoholic beverages with new tax revenues allocated to general expenditures increased net employment in several US states. There have been no studies in India that directly estimated the employment impact of health taxes either in tobacco, alcohol, or the SSB sector. A 2018 study estimated total tobacco-dependent full- time employment in India to be approximately 7.25 million (Nayak 2018) although the tobacco industry in India inadvertently claims tobacco employment to be upward of 45 million. According to the 2011 –12 national sample survey, employment in the manufacture of tobacco products constituted only 0.2 percent of rural and 0.1 percent of urban male population in the age group of 15–59 years and 1.1 percent of rural and 0.8 percent of urban female population in the same age group (Rawal and Saha 2015). It is also learned that, over the past five years, from 2017–18 to 2021–22, a total of 111,889 acres of land has transitioned from tobacco farming to the cultivation of alternative crops (India, MoA & FW 2022). However, it has not been established whether such changes were a result of health tax increase on tobacco. Total alcohol- related employment, taking into account alcohol retail, wholesale, and distribution segments is pegged at 1.5 million in India (WHO 2017a). An older study (Mohammad, Shatroopa, and Neeraj 2013) in India estimated that food processing accounts for about 14 percent of manufacturing GDP and employs about 13 million people directly and 35 million people indirectly. A 2014 study (Mukherjee et al. 2014), on the other hand, estimated the total direct employment in the beverage sector to be 123,407 and that in soft drinks and mineral water to be 47,844 in the year 2008. Tax increases on cigarettes across different countries are shown to have, at most, a minimal impact on the illicit trade of cigarettes, with more significant factors being weak tax administration and geographic considerations (WHO 2021b; Hefler 2020). There is sufficient evidence across countries that shows tax increases only have a minimal impact, if at all, on illicit trade of cigarettes (Hefler 2020). The risks of noncompliance and illicit trade are lower for SSBs due to their heavier weight compared to tobacco— which raises the costs of tax evasion—as well as their relatively lower market price.13 Although relatively scant in comparison to the literature on tobacco, there is also some evidence suggesting that increased health taxes do not contribute to illicit trade in SSBs(WHO 2022c). There are only two studies on illicit trade in cigarettes from India (Goodchild et al. 2020; John and Ross 2018), according to which illicit cigarettes as a percentage of the total cigarette market in India range from only 2.7 percent to 6.6 percent. The world average is 11.2 percent across 36 countries (Goodchild et al. 2020). Hence a threat of illicit trade should not undermine efforts to implement higher health taxes. When it comes to alcohol, India has a problem of high levels of unrecorded alcohol consumption (WHO 2022c).According to the WHO, during 2015–17, unrecorded consumption of alcohol, which includes homemade and illegal production, accounted for 45.6 percent of total alcohol consumption in India (WHO 2018). This is notably higher than the world average of 25.5 percent and the Southeast Asian average of 45.4 percent (WHO 2018). Some Indian studies have also examined the impact of increased tax on unhealthy products on tax revenue and deaths averted. One of the earlier studies (John et al. 2010) estimated that if India raises the tax share on bidis from 9 percent to 40 percent of retail price and on cigarettes from 38 percent to 78 percent of retail price, it would generate an additional US$3.9 billion in tax revenue for the government and prevent 18.9 million tobacco-attributable deaths. Another Indian study (Basu et al. 2014) had estimated a 20 percent SSB tax would reduce overweight and obesity prevalence by 3.0 percent and type 2 diabetes incidence by 1.6 percent among various Indian subpopulations over the period 2014 – 2023. A recent Indian study (John, Tullu, and Gupta 2022) estimated that a 29 percent GST compensation cess, instead of the existing 12 percent rate on SSBs, will have the effect of increasing GST revenue from SSBs by 27 percent. Another study conducted to evaluate the effects of increasing the price of sugar and/or SSBs on cavities incidence in the Indian population estimated that a 20 percent price hike in sugar could lead to health care cost savings of Rs. 3,116.32 billion (US$42.69 billion) in dental caries treatment. 13 According to the WHO “unrecorded alcohol refers to alcohol that is not accounted for in official statistics on alcohol taxation or sales in the country where it is consumed because it is usually produced, distributed and sold outside the formal channels under government control. Unrecorded alcohol consumption in a country includes consumption of homemade or informally produced alcohol (legal or illegal), smuggled alcohol, alcohol intended for industrial or medical uses, and alcohol obtained through cross-border shopping (which is recorded in a different jurisdiction).” (WHO 2018) 60 Abstract: The consumption of tobacco, alcohol, and sugar-sweetened beverages (SSBs) in India leads to significant public health and economic challenges, with 1.6 million deaths and 49.3 million disability-adjusted life years lost annually. These products are major risk factors for noncommunicable diseases, responsible for 64.9 percent of all deaths in India as of 2019. India is the world's second-largest tobacco consumer, with declining but still a substantial 267 million tobacco users. Alcohol consumption has seen per capita increases among drinkers, and India leads globally in sugar consumption. The economic burden from diseases related to these products is considerable, with tobacco-related costs at US$36.2 billion annually and alcohol-related costs at US$31.4 billion. Health taxes have been effective globally in reducing consumption and generating revenue while addressing market failures from negative externalities and internalities. India's current indirect tax system, involving a national-level Goods and Services Tax (GST) on tobacco and SSBs, as well as state-level excise duties and value added tax (VAT) on alcohol, poses challenges due to its complexity and inconsistencies. Tobacco products are taxed under GST at 28 percent with additional cesses, but rates remain well below the World Health Organization's recommendations, and its structure is highly complex. The GST applied on SSBs is not commensurate with the product’s sugar content. Excise duties and VAT applied on alcoholic beverages vary significantly across states. Reforming health taxes requires addressing these inconsistencies, improving tax compliance, and introducing new tax structures based on the relative harm of each product. Empirical evidence on the effectiveness of health taxes in India is limited, particularly for alcohol and SSBs. Policy priorities include increasing specific excise taxes, replacing compensation cess with health tax, simplifying the tax structure, regulating marketing practices, and detailed state-level analysis of alcohol taxation to find a preferred taxation regime on alcohol. ABOUT THIS SERIES: This series is produced by the Health, Nutrition, and Population (HNP) Global Practice of the World Bank. The papers in this series aim to provide a platform for publishing preliminary results on HNP topics to encourage discussion and debate. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations or to members of its Board of Executive Directors or the countries they represent. Citation and the use of material presented in this series should take into account its provisional nature.