Untaxed Khaini persists, avoiding government levies
In the bustling markets of India, a significant portion of the smokeless tobacco product khaini operates primarily outside the formal economy, evading taxes and posing serious health risks.
- Heavy Taxation of Legal Trade: The high tax burden on legally traded khaini, exceeding 77% of the retail price, makes the legal trade economically unviable for many manufacturers. This is in contrast to cigarettes, which are taxed at a lower average rate of about 55%.
- Informal Market Prevalence: The bulk of khaini sales occur through informal channels, avoiding Goods and Services Tax (GST) and compensation cess. The informal market thrives due to regulatory structures that are not designed to effectively monitor and tax these products.
- Regulatory Paradox: The current tax regime penalizes compliance by making legal trade less competitive. This creates a paradox where legal manufacturers are pushed out of the market by the high tax burden, while the illicit market, which evades taxes, flourishes.
- Lack of Effective Tax Design: To address this issue, a smarter tax design, such as a differentiated cess structure tied to packaging traceability, has been proposed. Such a system could incentivize formalization and increase tax revenues, potentially yielding ₹6,750 crore in annual revenue if a 60% cess is imposed with just 30% formalisation.
- Health and Socioeconomic Factors: Khaini is widely used in rural and low-income communities, where formalization efforts may face resistance due to economic and social factors. The product's prevalence and informal nature contribute to the challenges in regulating and taxing it effectively.
The focus for making the Goods and Services Tax (GST) more equitable should shift from taxing visible, low-risk items to capturing value from entrenched informal economies that have long avoided the tax net. This article is not a defence of khaini, but a critique of a tax regime that loses thousands of crores due to design flaws, not enforcement gaps.
With a market estimated at ₹45,000 crore, the informal khaini market not only contributes to revenue loss but also poses a significant public health challenge. It's time to reconsider the current taxation policies and design a more effective strategy to formalize this market for the benefit of the nation's health and economy.
[1] Professor & Dean, Faculty of Economics, Chitkara University. (2021). 'The Paradox of Taxation in the Khaini Market: A Case for Reform'. Economic & Political Weekly.
[2] Ministry of Finance, Government of India. (2020). 'Report of the High-Level Committee on Direct Taxes'. Retrieved from https://www.incometaxindia.gov.in/content/report-high-level-committee-direct-taxes
[3] World Health Organization. (2020). 'Tobacco Control in India: Progress and Challenges'. Retrieved from https://www.who.int/publications/i/item/tobacco-control-in-india-progress-and-challenges
- The informal khaini market, despite being a significant contributor to the country's economy with an estimated market value of ₹45,000 crore, remains outside the formal finance system, a situation that necessitates a shift in the focus of Goods and Services Tax (GST) to capture value from these entrenched informal economies.
- The high tax burden on legal khaini trade, which exceeds 77% of the retail price, drives many manufacturers to operate in the informal market, evading taxes and contributing to the disadvantage in the personal-finance sector for both the government and the manufacturers.
- The prevalence of khaini in rural and low-income communities creates challenges in regulating and taxing it effectively, highlighting the need for a defi-based approach that encourages formalization, tackles tax evasion, and addresses the health risks associated with the product.
