Question

Cigarettes constitute a mere 20% of tobacco consumption in India, and fewer than 15% of the 200 million tobacco users consume cigarettes. Yet these 15% contribute nearly 90% of the tax revenues to the exchequer from the tobacco sector. The punitive cigarette taxation regime has kept the tax base narrow, and reducing taxes will expand this base.
Which one of the following best bolsters the conclusion that reducing duties will expand the tax base?

• A. The cigarette manufacturers’ association has decided to indulge in aggressive promotion.
• B. There is a likelihood that tobacco consumers will shift to cigarette smoking if cigarette prices were to reduce.
• C. The cigarette manufacturers are lobbying for a reduction on duties.
• D. An increase in duties on non-cigarette tobacco may lead to a shift in favour of cigarette smoking.

Hint:

Consider external factors like price elasticity of demand when evaluating the effects of tax changes.

Answer 1

The Correct Option is B

The Correct Answer is (2), as it supports the idea that reducing cigarette prices will likely lead to an increase in consumption, thereby expanding the tax base, as more people will buy cigarettes at lower prices.