What is Sin Tax ?

IAS Prelims 2023

Sin Tax in India

Have you been sinning? If you’ve been gulping down fizzy drinks, zipping around in sports cars, pub-hopping or puffing away at cigarettes, the answer may have to be a yes. A committee headed by Arvind Subramanian has recommended that in a unified GST regime, certain goods should attract a demerit or ‘Sin’ Tax of 40 per cent.

Luxury cars, aerated beverages, paan masala, and tobacco products figure in this list. Coca-Cola India has reacted to this by saying a Sin Tax would reduce soft drink consumption and force it to shutter some of its Indian facilities.

sin taxWhat is Sin Tax?

‘Sin’ taxes are imposed to discourage consumers from using goods or services that are seen as undesirable or detrimental to society. Sin Taxes are intended to serve two objectives.

  1. One, to make the undesirable goods so expensive that rational consumers would be forced to give up the habit.
  2. Two, to make the industry producing these products pay higher tax, which can be used to fund other welfare expenditure.

Sin Taxes are now a global trend. In India, cigarettes, pan masala and liquor have always attracted high taxes, even under a non-GST regime. Countries such as the UK, Sweden and Canada impose Sin Taxes on a series of products and services, from tobacco and alcohol to lotteries, gambling and fuel, which chip in with sizeable revenues.

Mexico imposed a Soda Tax in 2013 and the UK is now debating a Sugar Tax, to tackle obesity, on all foods and drinks with high concentrations of the sweetener.

Why Sin Tax is important?

That excessive consumption of tobacco, alcohol or empty calories heightens health risks such as cancer, heart conditions and obesity, is quite well-documented by now.

Evidence from other countries that have imposed Sin Taxes shows the consumption of cigarettes and soft drinks has fallen significantly, after the new tax.

The huge revenues many State governments in India rake in from liquor sales (and taxes) show that Sin Taxes can mean a bonanza for the State.

In India, the case for taxing vices can be further bolstered by the fact that the country can ill-afford to fritter away its limited healthcare budget on avoidable health risks.

But then, economists and advocates of personal liberty have equally strong arguments again Sin Taxes too. For one, a definition of what constitutes a ‘vice’ can be pretty fluid. Sin Taxes can give the state unnecessary moral authority to dictate what citizens should and should not be doing.

Two, while Sin Taxes may reduce purchases of a product for a few initial years as fence-sitters or occasional users cut back, consumers who are really addicted to the habit may persist with their ‘sinning’. This can extract a steep toll on poor families.

Why should we care about Sin Tax?

If inflation is already taking a bite out of your household budget, Sin Taxes should worry you. Sin Taxes, once imposed, don’t really distinguish between occasional and addicted users of products and services.

Therefore, even if you personally stick to one litre of Coke every month, one annual driving holiday or an occasional bottle of wine, you’ll still be paying a Sin Tax on it. Then, there is the danger that once the government tastes success with one kind of Sin Tax, it may be tempted to extend it to a battery of others. Think of Sin Taxes on Bollywood item numbers, pure ghee sweets or skinny jeans!

The ordinary Indian taxpayer is already more sinned against, than sinning.