Rethinking taxes on tobacco and sugary drinks in India

India is witnessing a significant rise in obesity and non-communicable diseases (NCD), including heart attacks and strokes. Tobacco, alcohol, and sugar sweetened beverages are largely responsible for raising this burden. Today, India leads the world in sugar consumption, and alcohol drinkers are increasing their intake per capita. Although tobacco consumption is declining, Indians are still the world's second-largest consumers.

This is taking a terrible toll on the health of India’s people. In 2019 alone, NCDs accounted for 1.6 million deaths, more than two thirds of all deaths in India that year. Besides,  49.3 million years of healthy life, measured in disability-adjusted life years (DALYs), were lost.

The economic burden of this is staggering. In 2017-18, illnesses and deaths caused by tobacco use alone cost $36.2 billion, while alcohol use led to costs of $31.4 billion in 2013-14. This includes expenses for treating related diseases, as well as losses from early deaths and disabilities caused by consuming these products.

India’s tax on harmful products falls significantly short of WHO recommendations

The world over, taxes are used to reduce the consumption of harmful products. Yet, in India, tax rates on such products, especially on tobacco and sugar-sweetened beverages, have remained largely unchanged since 2017, despite their increasing affordability.

Cigarettes are taxed at approximately 53% of their retail price, while smokeless tobacco is taxed at 65%, and bidis (traditional hand rolled cigarettes made from tobacco wrapped in a tendu leaf) at 22%. This falls significantly short of the 75% tax rate recommended by the World Health Organization (WHO). In Brazil, on the other hand, tax rates generally hover around 60–70%, while in Indonesia they range between 50–60%, and the 28 countries of the European Union they average approximately 67.5%. On sugar sweetened beverages (SSBs), India’s tax is only about 28.6%.

The country now has an opportunity to address this issue. On March 31, 2026, the Goods and Services Tax (GST) Compensation Cess, which is currently applied to products like tobacco and SSBs, is due to expire. Replacing the Compensation Cess with a Health Cess can reduce the consumption of these unhealthy products, while maintaining public revenue.  Encouragingly, reports indicate that the GST Council is considering this approach.

The Compensation Cess was introduced in July 2017 to compensate states for the potential loss of revenue during the transition to the nation-wide GST system. Its expiration without a suitable replacement would make these products more affordable, with adverse impacts on people’s health.

In India, GST is applied as a percentage of the retail price (ad valorem) while it is known that specific taxes, levied per cigarette stick or bidi, per volume of alcoholic beverage, or per gram of sugar, are more effective in regulating consumption. But the harm caused by these products is tied to the amount consumed, not to their value. Besides, when taxes are specific, industry has limited ability to manipulate prices or encourage consumers to switch to cheaper, equally harmful, options.

Most countries tax unhealthy products by using a specific excise duty, or a combination of a specific excise duty and ad valorem duties. In India, the GST on these products is levied ad valorem. Additionally, the introduction of GST led to a significant decline in excise taxes on tobacco, which fell from 54% to a mere 8% for cigarettes. A similar decline was seen in the share of excise taxes on bidis, smokeless products and SSBs, reducing the tax system's effectiveness in deterring their use. A recent World Bank report “A Diagnostic of the Health Taxes Landscape in India” highlights these issues in greater detail.

India has an opportunity to improve the health and well-being of the people and the nation

On March 31, 2026, the GST Council will also have an opportunity to address inconsistencies in the tax framework for unhealthy products. For instance, bidis, India's most smoked tobacco product, are exempt from the Compensation Cess, resulting in a tax burden of a mere 22% despite being as harmful as cigarettes. The new Health Cess can thus be extended to bidis, ensuring that all unhealthy products are taxed comparably to prevent harmful substitutions. This will also align with international best practice.

Replacing the Compensation Cess with a robust, specific Health Cess, and extending it to bidis, will not only align India's tax system with its public health goals but also generate vital revenue for development. This is a win-win scenario that policymakers must seize to improve the health and economic well-being of the nation.