All you need to know about Sin Tax

Have you ever wondered why the liquor that you buy from the duty-free shops at the airport shops is so much cheaper than outside?

Or why income from a lottery is taxed even if it is less than the basic exemption limit?
Well, the Govt deems these activities as “sinful” and that’s why you need to pay more taxes on them to repent for your sins.

Sin tax came under the spotlight again after the conversation around 28% GST on crypto-related activities started making rounds. So what is sin tax? Is it actually effective? Let’s find out

What is Sin Tax?

Sin Tax is a tax that is levied on goods and services that are considered detrimental to the individual and society in general.
The first thing that occurs to most of us when we think about “sinful” products is alcohol and tobacco and our government thinks so too.
If we talk about cigarettes, they are slapped with the highest GST rate i.e 28%.
But wait that’s not all!

Cigarettes along with other tobacco products attract a high cess as well. Before you ask, cess is paid by the Central Govt. to state governments to make up for any loss of revenue that might happen because of a high GST. And it’s no rocket science that the cess will also figure into the total price of the end product.

So, if we were to give you a very clear picture, taxes make up more than 52% of the total buying price of cigarettes. Steep enough? Well, apparently not. WHO recommends a  tax burden of at least 75% for all tobacco products to curb their usage. Now that is steep!

Alcohol is another product that is subjected to sin tax. While there’s no GST on alcohol, they come under the purview of state governments, and most states levy either VAT or Excise duty or both. Taxes on liquor actually make up one of the biggest revenue sources for the state governments.
Maharashtra has the highest liquor tax rate while its hippy neighbor Goa has the lowest. And in case, you are wondering, taxes can make up to 80% of the end price of liquor. Let’s raise a toast to that now, shall we

Apart from products, there are also certain activities as well that are considered to have a harmful impact on society. Lottery and gambling are prime examples. Income from lottery and gambling are subjected to 30% tax and it is also subjected to…you guessed it right…additional cess too. And this rate is independent of your tax slab rate in general.
For example, if you fall under the 15% tax bracket, your income from lottery and gambling will still be taxed at a 30% rate+ cess.

So, tomorrow, if you wake up to the news of winning a lottery, don’t forget that you have to pay a pretty steep tax on it. 

The latest entrant in the club of sin tax seems to be cryptocurrencies. With an Income tax rate of 30% and the possibility of a 28% GST rate, lawmakers seem to want people to stay away from the bitcoins and the Shiba Inus (pun intended).

Sin Tax Across the World

If you think sin taxes are only prevalent in India, then you are mistaken. Most countries across the world use tax as a way to keep people away from certain things and activities that are deemed to be harmful. Take Europe for example. Most European countries impose very high excise duties on cigarettes, with countries like France, Ireland & Denmark being the leader on top of that, all EU countries levy VAT on cigarettes as well.

And it is just not vices like smoking and drinking, that lawmakers frown upon. Unhealthy food and drinks have also caught the eye of lawmakers. In England, Manufacturers of soft drinks containing more than 5g of sugar/100ml have to pay an extra levy. 

Mexico and Hungary took it a step further by levying junk food taxes on certain unhealthy food and beverages. Hungary levied a 4% tax on packaged foods and drinks having high levels of sugar and salt in certain product categories. Mexico on the other hand levied an 8% tax on all “non-essential” foods which exceeded a certain calorie threshold. 

But do sin taxes work? That is a separate discussion altogether.

Why Sin Tax?

The primary objective of a sin tax is to dissuade people from indulging in activities that are harmful to their own selves and society in general. 

By implementing a high tax rate on such goods and services, they want to make them unaffordable or too expensive for people.

The case for Sin Tax is the classic “Law of Demand”. The quantity purchased of a good varies inversely with price. In other words, the cheaper an item is, the more it will be demanded. Economics 101. Many countries of East Asia, actually bear witness to this logic. Cigarettes are relatively cheap and affordable in most East Asian countries and this region accounts for a lion’s share of the world’s smokers including a high percentage of underage smokers. 

There have been examples that have shown that sin tax works. For example, in Mexico, there has been a decrease in the consumption of foods that were taxed, and even in England, consumption of sugary drinks went down once the levy was introduced. 

The second case for sin tax is revenue generation. The sin taxes help governments generate a significant portion of their revenue. This revenue can indeed help the government fund welfare schemes to fight the effects of these very vices. 

Arguments against sin tax

Sin tax is indeed a controversial topic and not everybody will be on board with it.

Many argue that governments should not take a moral high ground in deciding what is good for individuals and what is not. Plus, sin taxes don’t differentiate between who is an addict and who is just an occasional user. So, even if you enjoy a glass of soft drinks once in a while, you still have to pay a higher tax on it. 

Continuing this very chain of thought, another argument against sin tax is that in the name of keeping people away from practices, the government can impose sin tax on a wide variety of things such as sweets, eating out, certain pieces of clothing, and so on. This directly contradicts the pillars of personal freedom and choice

Secondly, sin tax is mostly regressive. A 50% tax on cigarettes would take a lot more away from a poor person’s income than a middle class or rich person’s income.

Manufacturing houses have often said that a higher tax on cigarettes and alcohol will encourage black marketing. People might resort to cheaper and illegal alternatives which usually are extremely harmful to their health and this defeats the point of sin tax altogether. 

Lastly, many believe that sin taxes don’t work. Proponents of sin tax say that a higher price of harmful goods will keep people away from consuming them.
While this may hold true for certain goods and occasional users, it mostly doesn’t hold true for addicts. 

Addiction is an exception to the law of demand. If an individual is addicted to alcohol or cigarette, they will continue to consume them irrespective of their prices and they will end up spending less on other essential goods. 

So are you team pro sin tax or team no sin tax? Share your thoughts with us