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Budget 2008-09 - Sin Tax Reversed
June, 02nd 2008

Pan Masala now attracts 8% excise duty after this Budget. In comparison, other goods in the Chapter-21 containing miscellaneous edible preparations attract 14%, which is the general rate of excise now. In the Budget it has been announced that "excise duty on pan masala, not containing tobacco, with betel nut content not more than 15%, has been reduced from 16% to 8%. It has also been exempted from National Calamity Contingent Duty".
The duty was much higher earlier and has been reduced gradually to now 8%. In 2002[1] the duty was fixed at 50% of the maximum retail value on the packages of pan masala in small packs up to 4 gms. In this Budget had the duty not been particularly reduced for pan masala, it would have been 14%. This special concession, therefore, is a consideration to deliberately give a fillip to pan masala considering that even the National Calamity Contingent Duty has also been exempted.
And Pan Masala can by no means be considered as a desirable edible item. Between the different tobacco products it is the worst from the health point of view. Reducing tax on such a product is to reduce the sin tax.
A tax that is imposed on products or services that has seen as vice or sin such as alcohol, tobacco and gambling is called a sin tax. These types of taxes are levied by government to discourage an individual from partaking in such activities without making the use of the product illegal. The additional benefit is that these taxes provide a source of government revenue.
Governments favour sin taxes because they generate an enormous amount of revenue. They are usually accepted by the general public because their indirect taxes and affect those people who consume them. They do not affect the general run of people. In fact, these heavy taxes on sin prevent people at least to some extent to commit those sins. Sin tax is considered as one of the traditional means of bringing a modicum of market forces to economic situations where externality problems exist. And thus it results in better market efficiency.
The generic name for such taxes levied to correct negative externalities of a market activity is Pigovian tax. This tax is named after the economist Arthur Pigou who also developed the concept of economic externalities. In the working of the Pigovian tax the key problem is that of calculating what level of tax will counter balance the negative externality.
Pollution tax is one such kind of initiative which can be mounted with the levy of sin tax. With a sin tax (Pigovian tax) there is always an incentive to reduce pollution, whereas with direct regulation a polluting company has no incentive to pollute any less than what is allowable. Thus sin tax is better than a direct control.For the government the sin tax is the great source of revenue.

Sector FY00 FY01 FY02 FY03 FY04
Automobiles 16.8 16.4 16.2 15.1 14.0
Petro products 13.6 9.4 11.4 11.4 11.3
Tobacco & Beverages 68.6 68.8 73.6 73.1 72.4
All Industry 11.6 10.1 10.8 10.7 10.5

    The conclusion is that the latest initiative in the Budget reducing the sin tax on pan masala has been a retrograde step from the points of view of both revenue and public health. It is a case of reverse sin tax. The lobby for pan masala had its way.

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