CASE STUDY

“BAN ON PUBLIC SMOKING vs.

IMPOSITION OF TAX ON TOBACCO”

SUBMITTED TO: PROF. SAMIK SHOME

SUBMITTED BY: GROUP 4
Aditya Jain-09PG303

Chawla Manisha-09PG313

Karthik vishwanath-09PG323

Pooja Prasad-09PG333

Sandeep Babaji-09PG342

Swati Ray-09PG352

SUBMITTED ON: 9th Nov.2009

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CONTENTS:
Sr No. Topic Page no.

1. Executive Summary. 3

2. Introduction to the Case. 3

3. Tobacco Industry and Taxes. 4

4. Issue statement. 5

5. Analysis of the case

(A) PESTLE Analysis. 6

(B)Graphical Analysis. 7

6. Conclusion. 8

7. Alternate Solutions. 9

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EXECUTIVE SUMMARY:-
The Cigarette industry has always been on the receiving end when it comes to
imposition of taxes and duties in the financial budget of the country affecting its
competitiveness in the global market. The growth of cigarette industry is being further stifled
by the imposition of ban on smoking at public places such as hotels, restaurants, cinemas etc.
In addition to this, attempts to make people aware of the harmful effects of smoking have
been increased. But the objective of achieving a smoke free environment and better health for
people by imposing these measures is still debatable.

The government of India came up with a law in the form of the Prohibition of
Smoking in Public Places Rules, 2008 via Notification No.GSR417 (E) dated 30th May, 2008
issued by Ministry of Health and Family Welfare. India has had laws against smoking in
public places but they have not been enforced strictly. India is the third-largest tobacco
producer and consumer in the world after China and the United States. The point of debate
arises that whether this ban on smoking is actually feasible or not. Many health experts and
environmentalists have argued that public ban alone will not reduce the prevalence of
smoking and its ill-effects, but imposition of tax on tobacco products is also necessary to cut
down the level of smoking.

INTRODUCTION:-
The given case starts with one of India’s most controversial issue i.e. imposing
strict rules against the usage of tobacco related products. In order to take a step towards it
Indian government banned smoking in public places from Oct 2, 2008, the birth anniversary
of Mahatma Gandhi. Many facts and opinions arose after this action, some of which favoured
the act whereas some did not. For instance, some were of the opinion that the death rate of
Indian population is increasing year by year and hence imposing high tax on tobacco related
products will not only put a full stop in the death rate but also reduce the number of
consumers who shift to cheap tobacco products to avoid using comparatively costly tobacco
products. Whereas some stated that tobacco industry is one of India’s high revenue
generating industry. It’s been produced on a very large scale from so many years in so many
states. Not only this, it provides employment to approximately 4.9 million rural people.
Hence putting tax on tobacco would result in sharp decrease in the overall economy.

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 The problem that the government faces is to find a method which would not only
reduce the consumption of tobacco and hence the death rate but also have no or very little
effect on the revenue generated from this industry.

TOBACCO INDUSTRY AND TAX:-

Tobacco industry has always been at the top of the list of industries which are of
major concern from government point of view. In spite of having some positive features of
the tobacco industry, government has put ban or raise the rates of tax on tobacco related
products in order to save people from getting affected by the health hazards which one may
get prone to after continuous consumption of the tobacco products.

The following is the impact of tax on the consumers as well as on the

manufacturer:-

Effect of tax on consumers:-

The tax imposition on the tobacco products usually affects the consumers in the
form of sales tax on the product. Considering amount of tobacco related products to be
constant, if the tax rates decreases an increase in demand for the product will be seen .i.e. the
consumer is tend to buy more and more of the tobacco product whereas an increase in the tax

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rate would increase the price of the product and hence the demand will be decreased or
customers would not buy the product disregard of the interest.

Effect of tax on Manufacturers:-

Taxes on the manufacturers are not directly levied on the buyer but on the seller.
This creates an upward shift in the supply curve by the amount of the tax, and creates a new
equilibrium in the market. With the upward shift of the supply curve the demand moves from
a greater quantity to a lesser quantity. This increases the buyer's purchase price while
simultaneously lowering the amount received by the seller. The burden of the tax is still
shared by the seller and buyer as shown in Graph B above.

ISSUE STATEMENT:
Ban on Public Smoking or Imposition of Tax on Tobacco, which of these should be
adopted keeping in view the needs of country like India.

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ANALYSIS OF THE CASE:-
(A) PESTLE Analysis:-
Political
According to the case, the Indian government is seen to be in a very critical position,
where it has to safeguard the interest of the tobacco industry which is one of the major
revenue generators for the government as well as to look after the health issues of the Indian
people.

Economical

The tobacco industry has always been one of the major revenue generating sectors for
Indian economy. This can be proven from the fact that excise revenue generated from
cigarettes increased from Rs.1930 million per annum in the year 1971-1972 to Rs. 51,118
million per annum in years 1998-1999. Whereas for other tobacco products it raised from
Rs.840 million per annum to Rs.8322 million per annum for the same time periods.

Social

Currently in India there are approximately more than 120 million smokers. It is
estimated that by 2010 about a million deaths will occur due to smoking alone, of which
930,000 will comprise of adult smokers (both male and female included).beside these other
health hazards such as ulceration, stomatitis etc. are said to aggravate in the smoking
population. The non-smoking population are also said to be affected by their counterparts.

Legal

The imposition of ban in public places was the legal step taken by the Indian
government towards reducing excessive tobacco consumption in order to lower down the
increasing number of deaths caused by it.

Environmental

The waste from tobacco production plays a role in polluting the surroundings. Also
another negative aspect of tobacco consumption is the effect it has on non-smokers (ex: the
health issues faced by passive smokers due to chain smokers). .

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B) Graphical Analysis:-
(1).Graph showing trend in tobacco consumption in India:

400
350 Cig a r r e te s No
Cig a r r e te s %
300
B id is No
250
B id is %
200
S mo kin g No .
150
S mo kin g %
100
O th e r s No .
50 O th e r s %
0
1 9 7 1 - 7 21 9 8 1 - 8 21 9 9 1 - 9 21 9 9 2 - 9 31 9 9 3 - 9 14 9 9 4 - 9 51 9 9 5 - 9 61 9 9 6 - 9 71 9 9 7 - 9 81 9 9 8 - 9 9

Graph -C.

X :axis tobacco consumption , Y axis: Years

The above graph shows the consumption trend of tobacco products (like-
cigarettes, bidis etc.) amongst consumers in India. The increased consumption of bidis and
other products can be attributed to the less tax rates as compared to that of cigarettes. The
main reason behind these less tax rates is that these non-cigarette tobacco products are mainly
used by the poor and hence increasing bidi taxes will impose financial burden, given the
addictive nature of its consumption.

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(2).Price Elasticity Curve:-

Fig-3

As it is clearly seen in the above graph, the law of demand is followed in tobacco
industry. I.e. as the price of tobacco products increases the demand for that product decreases.
Similarly, as the price decreases the demand increases. Thus, government decision to impose
tax on tobacco and thereby increasing its price seems to affect the consumption of tobacco
products..

CONCLUSION:-
The imposition of ban on public smoking and tax on tobacco products (like-
cigarettes, bidis etc.) was introduced in order to curb the death rate caused by it. However an
expected general outcry regarding the above social issue showed the addictive nature of
smokers towards the product. Also the downgrading of consumers from cigarettes to other
harmful tobacco products determines the intensity of their addictiveness.

These outcomes are due to the lack of well-thought implementation of tax law by
the government. They should have thought of curbing the use of tobacco related products
slowly over a period of time so, that sudden change in the revenue be avoided.

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ALTERNATIVE SOLUTION:-
The following steps can be useful to reduce the rate of tobacco consumption:-

(A).Encouraging anti-smoking activities.

(B).Educating poors of the ill-effects of using tobacco products.

(C).Focussing on other revenue generating industries.

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 -

Tobacco
consumptio
n in
thousand

10
.

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