Sin goods and sin tax

March 9, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

Sin goods and sin tax

Subject: Economy

Section: Fiscal Policy

Concept:

Sin goods are goods which are considered harmful to society. Examples of sin goods: Alcohol and Tobacco, Candies, Drugs, Soft drinks, Fast foods, Coffee, Sugar, Gambling, etc. Taxes levied by the government on sin goods called Sin Tax.

A sin tax is placed on goods and services that are seen to be socially detrimental. Thus, Tobacco, gambling ventures, alcohol, cigarettes, and other things are examples of products that are subject to a sin tax.

According to the current GST rate structure, some of the sin goods that attract a cess include cigarettes, pan masala and aerated drinks. Apart from sin goods, luxury products like cars also attract a cess. Sin Taxes are intended to serve two objectives:

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

Society accepts sin taxes because they affect only those who use sin taxed products or engage in sin taxed behaviors. When individual states run a deficit, a sin tax is generally one of the first taxes recommended by lawmakers to help fill the budget gap. A sin tax is a type of Pigovian tax, which is levied on companies which create negative externalities with their business practices. Sin tax proponents maintain that the targeted behaviours and goods produce negative externalities. Sin taxes are typically regressive taxes, meaning the less money a person makes, the more significant is the percentage of their income these taxes consume.

Examples of sin tax

Tobacco products are taxed at a rate of 28 per cent in India, whereas tobacco leaves are taxed at a rate of 5%.
Under the current GST structure, some of the sin goods that attract an additional cess include tobacco products, aerated drinks and pan masala. The cess is paid by the centre to states to compensate for any loss of revenue arising on account of implementation of GST. There is a cess of 65% on unmanufactured tobacco bearing a brand name while it is 160% for scented zarda. Pan masala containing gutkha is subject to a cess of 204%.The current cess on cigarettes is 5% plus up to Rs 4,170 per 1,000 sticks.

National Calamity Contingent Duty-The National Calamity Contingency Fund (NCCF) is a dedicated fund maintained by the Government of India for supplementing the disaster relief efforts of various state governments and is operated under the broad framework laid down by the 11th Finance Commission. It has a core corpus of Rs. 500 crore and is replenished through the National Calamity Contingent Duty imposed on cigarettes, pan masala, beedis, other tobacco products and cellular phones.