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A sin tax is imposed on goods and services, which are perceived as harmful to society. Examples of products on which sin tax is imposed are: tobacco, gambling ventures, alcohol, cigarettes, etc.
What is the main purpose of sin tax?
Sin taxes seek to prevent people from participating in socially harmful activities. The aim is to reduce or eliminate the consumption of harmful products by making them more expensive to obtain. They also provide a source of revenue for governments. In March 2019, a committee headed by Arvind Subramanian recommended that in a unified GST regime, certain goods should attract a ‘Sin’ tax of 40 per cent.
Sin tax a global trend
In 1776, Adam Smith - Father of Economics - wrote that taxes on cigarettes, rum, and sugar are appropriate.
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 is it necessary?
Sin Taxes are intended to serve two objectives.
1. To make the undesirable goods so expensive that rational consumers would be forced to give up the habit
2. Make companies producing these products pay higher tax, which can be used to fund other welfare programmes. Eg: Sweden uses the excess tax collected from gambling to help people with gambling problems
Excessive consumption of tobacco, alcohol or calories heightens health risks such as heart attack, cancer and obesity. Studies have shown that sin taxes have been successful in reducing consumption of harmful products and states have gained sufficient capital out of the excess tax.
Criticisms against sin tax
Critics argue that sin taxes can give the state unnecessary moral authority to dictate what citizens should and should not be doing. They are also of the opinion that while sin taxes may reduce purchases of a product for a few years, consumers who are really addicted to the habit may persist buying.
Sin taxes are often termed regressive as they discriminate against the lower classes. The poor end up paying a greater share of their income as tax.