The Hindu Editorial Analysis- 1st July 2025 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

GST Reform and Unfinished Business in Tobacco Control

Why in News?

 Simplifying tax rates should fix flaws in tobacco taxes while balancing the needs of the economy and public health. 

Introduction

As India marks eight years of the Goods and Services Tax (GST) since its introduction on July 1, 2017, it's an opportune moment to assess this significant reform. GST replaced various indirect taxes like VAT, excise duty, and service tax, consolidating them into a single system. This move facilitated the creation of a unified national market under the principle of “One Nation, One Tax.” The reform ensured uniform tax rates across states, simplified business operations, and strengthened economic connectivity among different regions of the country. Moreover, GST has proven to be a reliable source of revenue for the government, with gross collections reaching a record ₹22.08 lakh crore in 2024–25, reflecting a year-on-year growth of 9.4%.

• Beyond revenue generation, GST has enhanced economic efficiency by addressing the issue of cascading taxes (tax on tax) through the input tax credit system. This mechanism has contributed to reducing production costs, benefiting both businesses and consumers.
• Compliance has been streamlined thanks to digital initiatives like the e-way bill, simplifying tax filing processes and aiding in the reduction of tax evasion.
• The elimination of inter-State checkpoints has expedited logistics, decreasing transport time by up to 20% and lowering transport costs.

Faultlines in taxation

Public Health Impact

• Tobacco use is responsible for over 3,500 deaths daily in India and results in an economic loss of ₹2,340 billion annually, which was 1.4% of GDP in 2017.

Tobacco Revenue from GST

• The average GST revenue from tobacco over the past five years is approximately ₹551 billion per year, significantly lower than the health-related losses caused by tobacco.

Tobacco Use in India

• India is the second-largest consumer of tobacco globally, with usage rates of 28.6% among adults and 8.5% among students aged 13 to 15 years.

Role of Taxation

• Higher taxes are recognized worldwide as one of the most effective means to reduce tobacco consumption.

Pre-GST Tax Trend

• From 2009 to 2017, regular increases in excise and VAT led to a 17% decline in tobacco usage.

Post-GST Situation

• Since the implementation of GST, there have been no significant tax hikes on tobacco products, making them more affordable and potentially increasing usage rates.

WHO Recommendation

• The World Health Organization advises that 75% of the retail price should be allocated to taxes on tobacco products.

Current Tax Burden in India

• Bidis: 22% tax
• Cigarettes: 54% tax
• Smokeless tobacco: 65% tax

These rates are all below the standards recommended by the WHO.

Structural Problems in Tobacco Taxation under GST

• Heavy Dependence on Ad Valorem Taxes: GST primarily relies on ad valorem taxes (based on price). However, specific excise taxes (a fixed amount per unit) are more effective in reducing the use of harmful products like tobacco. Ad valorem taxes can be manipulated by the industry, diminishing the impact of taxation on consumer behavior.
• Decline in Central Excise Share Since GST: The share of excise duty in total tax revenue for tobacco products has significantly decreased since the implementation of GST, weakening the public health impact of tobacco taxation. Many countries with GST or VAT systems include specific excise taxes on tobacco for health reasons.
• Inequity in Tobacco Taxation: Cigarettes, while constituting only 15% of tobacco users, account for over 80% of tax revenue. Bidis, commonly used by low-income groups, are under-taxed despite their harmful effects. Bidis are not subject to the GST Compensation Cess, unlike other tobacco products, which lacks a health-based justification.
• Upcoming Threat: Compensation Cess Expiry: The GST Compensation Cess, which contributes about 50% of total tobacco taxes (particularly for cigarettes), may expire in March 2026. Its removal would lead to lower tobacco prices, adversely affecting public health initiatives.

Stronger, Smarter Tax Policy

• Raise GST rate on tobacco to 40%: This is the maximum allowed under GST law and would help reduce consumption.
• Add or increase specific excise taxes: This would strengthen the public health impact of tobacco taxation.
• Adopt a mixed tax system: Using both ad valorem and specific excise taxes has been proven to be more effective in reducing consumption, increasing tax revenue, and preventing price manipulation.

Rethinking Tobacco Taxation Amid GST Reforms

• Myth of Illicit Trade and Higher Taxes: The tobacco industry argues that higher taxes lead to increased illicit trade. However, independent studies indicate that illicit cigarettes comprise only 2.7% to 6.6% of the Indian market, much lower than the industry’s claim of 25%. Research shows that tax increases have minimal impact on illicit trade, while better enforcement and governance are more crucial.
• India’s Global Commitment: India has ratified the WHO Protocol to Eliminate Illicit Trade in Tobacco Products and needs to focus on implementing it to close regulatory gaps and prevent tax leakages.
• GST Council's Opportunity: Prioritise Public Health: As the GST Council considers rate rationalisation and structural reform, it should prioritize public health. The Parliamentary Standing Committee has highlighted the need for higher taxes on all forms of tobacco due to their affordability in India.

Recommended Strategy for Reform

Why It Matters

• This approach would reduce the health and economic burdens of tobacco use, enhance fiscal consolidation, and demonstrate India’s commitment to health and developmental objectives.
• The completion of eight years of GST presents a timely opportunity to address the current shortcomings in tobacco taxation.
• Implementing these changes would evolve GST into a more effective instrument for public health and fiscal reform.

Conclusion

• As GST marks its eighth anniversary, reforming tobacco taxation emerges as both urgent and strategic. By aligning GST with public health objectives through increased rates and specific excise duties, it is possible to curtail consumption, enhance revenue, and mitigate health-related expenses.
•  With the impending 2026 cess expiry, the GST Council has a timely opportunity to address existing gaps and reaffirm India’s dedication to health and fiscal accountability.

In a perilous world, India must read the tea leaves wellWhy in News?

 The world is undergoing significant changes that may not align with India’s traditional policies. It would be prudent for New Delhi to prepare for various scenarios and adapt to new global realities. 

Introduction

India’s foreign policy is currently facing a significant challenge. The anticipated return of the Trump administration, which was initially seen as beneficial for India, has disrupted the country’s diplomatic strategy. The recent conflict between India and Pakistan should serve as a wake-up call. With increasing evidence of military collaboration between China and Pakistan, including equipment transfers, India needs to be vigilant.

In addition to the China-Pakistan alliance, India’s stance on West Asia, particularly regarding the Israel-Iran conflict, requires serious reconsideration.

Until now, India has attempted to maintain a neutral position, but this approach has proven to be ineffective. With the United States taking a more active role in the region, the situation has escalated. The U.S. recently employed its GBU-57 bunker buster bomb for the first time to target Iran’s nuclear facilities at Fordow, Natanz, and other underground sites.

Given this new reality, India’s neutrality may no longer be a viable option. Despite the announcement of a ceasefire, the possibility of a full-scale war remains high. India must reevaluate its position and prioritize its national interests.

A New Phase in the West Asia Conflict

The recent use of GBU-57 bunker buster bombs signifies a serious escalation in the Israel-Iran conflict. The previously sensitive topic of Iran's nuclear capabilities is now being openly discussed, raising concerns about global security. India's attempt to maintain neutrality in such a volatile situation is increasingly being questioned. This is not merely a wake-up call; it is a pressing global security challenge that requires immediate attention.

India’s Neutrality: Growing Costs and Limited Returns

It is crucial for India to reassess the effectiveness of its neutrality in serving national interests. With diminishing benefits, a shift in foreign policy approach is necessary.

US Policy and Rising Tensions with India

Donald Trump’s “Make America Great Again” (MAGA) policies are now affecting India negatively, extending beyond just trade and economic issues. After the India-Pakistan conflict in May, Trump claimed credit for facilitating a ceasefire, a narrative India disputes. This has created a diplomatic imbalance, as Pakistan’s Field Marshal Munir supports Trump’s role, contrasting with Modi’s silence on a US visit.

This situation risks driving India and the US towards conflicting paths, particularly in global diplomacy.

India’s Israel-Iran Dilemma

India’s attempt to balance its position in the Israel-Iran conflict has left it feeling isolated. Support for Israel has not yielded positive outcomes and is becoming a burden, while Iran, once an ally, is not receiving strong backing. This middle-ground approach is proving ineffective in the current geopolitical landscape.

Global Shifts: From Soft Power to Hard Power

The trend is moving away from consensus building towards military posturing. India needs to align its policies with this strategic realism and adapt to the changing global mood.

Key Takeaways and Strategic Imperatives

India’s neutrality is increasingly perceived as weakness, reflecting indecision rather than strength. The global landscape is less forgiving, with real-time conflicts testing alliances. A review of foreign policy is essential to navigate a more polarised and high-risk world. To remain relevant, India needs a clear stance, strategic partnerships, and firm diplomatic decisions.

Need for Comprehensive Strategic Preparedness

India must prepare for various future conflicts, particularly after the May India-Pakistan clash, which was only a temporary pause. A thorough analysis of the strengthening and complex China-Pakistan military alliance is essential.

Understanding the China-Pakistan Defence Integration

Focus Area

• Joint Military Capabilities: China and Pakistan have deep defence ties, with well-integrated military operations.
• Use of Chinese Weaponry: Pakistan relies heavily on Chinese weapons systems and technologies for its defence.
• Integrated Targeting Systems: Pakistan claims advanced integration capabilities for locking onto hostile targets, showcasing technological advancements.
• Air Power Details Needed: India must assess the capabilities and numbers of JF-17 and J-10C fighter jets in Pakistan's air force for a clearer picture of their air power.

Learning from Global Best Practices

Similar to the UK, which recently evaluated its defence readiness, India should also review its capability to sustain prolonged conflicts. The UK's review underscored:

• Inadequate ammunition stockpiles
• Need for a National Armament System
• Establishment of a Cyber and Electromagnetic Command for digital and electronic warfare

India’s Defence Upgrades: Priority Areas

Prepare for a Two-Front War involving China and Pakistan.

Learn from the Russia-Ukraine war, focusing on supply chains, stockpiles, and modern warfare strategies.

Emphasize Artificial Intelligence (AI) in strategic decision-making and battlefield management.

Strengthen capabilities in:

• Electro-magnetic warfare to counter drones
• Loitering munitions
• Glide bombs and modern aerial threats

China’s white paper

While focusing on Pakistan, India should also analyze China’s recent white paper on “National Security in the ‘New Era’.” This document outlines China’s strategic thinking, emphasizing the close link between development and security, the need to protect scientific and technological security, and the importance of stable supply chains. It also highlights potential threats in China’s neighbouring regions.

Conclusion

China’s strategic partnership with Pakistan poses a significant challenge for India, especially given China’s nuclear superiority. With a nuclear warhead advantage of over 3:1, and nearly 5:1 when combining Chinese and Pakistani nuclear capabilities, India must take this threat seriously.