The Missed Billions in India’s Untaxed Khaini Market

New Delhi: Earlier this year, the GST Council faced public ridicule for proposing higher taxes on caramel popcorn. It became a symbol of misplaced priorities: taxing an everyday snack while far larger, more consequential markets remain out of the tax net.

Nowhere is this clearer than in India’s smokeless tobacco sector — especially khaini.

Khaini is a filtered oral tobacco product used daily by millions, especially in rural and low-income communities. It accounts for a major share of India’s tobacco consumption. Yet most khaini escapes both GST and compensation cess — not through formal exemption, but by flowing through informal, unregulated channels.

Here’s the paradox: when khaini is sold through formal channels — in QR-coded, tax-declared packs — it faces a combined tax burden of around 77% of the retail price. In contrast, many cigarette brands are taxed at 51–71%, with a market-weighted average of about 55%.

So a product primarily used by low-income Indians ends up more heavily taxed than cigarettes — but only when it’s declared. This isn’t just irrational. It’s regressive.

According to the Global Adult Tobacco Survey (GATS 2016–17), more Indians use smokeless tobacco (21.4%) than cigarettes (10.7%), with khaini as the most common form. Yet cigarette manufacturers operate under a stable, predictable tax regime, while compliant khaini makers are penalized — not because khaini is taxed by design, but because it's declared.

The result? The formal cigarette industry enjoys lower effective tax rates despite serving a more affluent segment, while khaini — used disproportionately by the poor — is punished for entering the formal economy. The signals are upside down: evasion is easier and cheaper than compliance.

This creates a dangerous disincentive. Compliant khaini manufacturers face unsustainable tax burdens and are undercut by untaxed competitors. The result? A ₹45,000 crore industry that operates largely underground, generates almost no tax revenue, and escapes regulatory oversight.

In effect, the current tax regime doesn’t just overlook the black market — it fuels it. By making formalization economically irrational, it pushes producers out of the legal system and encourages opacity. Compliance is penalized; evasion is rewarded.

Ironically, this burden falls heaviest on a product that is both disproportionately used by the poor — and significantly less harmful than cigarettes. Khaini, while addictive and unsafe, is a non-combustible form of tobacco. It does not carry the same respiratory and cardiovascular risks that make cigarettes so deadly. This is well-established in global studies, including WHO’s own tobacco product regulation reports. Yet, formalized khaini is taxed more heavily than cigarettes — simply because it shows up in the system.

India’s tax design doesn’t just fail to capture revenue — it actively discourages transparency. It protects black-market dominance and costs the exchequer thousands of crores each year.

A differentiated cess for khaini in pre-packaged, traceable formats — say 30% to 60% — could reduce the effective tax burden to 37–50% of the retail price. This would keep khaini taxed comparably to cigarettes but make formalization viable.

Consider two practical scenarios:
 • Scenario A: With a 60% cess and just 30% market formalization, annual tax revenue could reach ₹6,750 crore — a sixfold increase from current levels.
 • Scenario B: With a 30% cess and 40% formalization, collections could touch ₹6,660 crore, along with the added benefits of traceability and oversight.

These figures don’t include downstream gains — such as employment visibility, digital invoicing, product safety, and supply chain monitoring. Nor do they reflect the long-term strategic value of integrating compliant khaini into India’s broader tobacco modernization and export strategy.

Importantly, this isn’t an untested idea. India has already used this playbook in other deeply informal sectors — gold, textiles, kirana retail, and digital payments. Success came not from heavy enforcement, but by making compliance feasible and rewarding. Smokeless tobacco deserves the same approach.

This isn’t about promoting khaini. It’s about fixing a structural flaw in how India taxes tobacco. A mass-consumed product goes untaxed and unregulated — not because it’s untaxable, but because the current system makes compliance economically irrational.

A smarter cess structure would unlock thousands of crores in revenue — and more importantly, signal that India’s GST system can adapt to ground realities, reward transparency, and bring informal sectors into the fold.

It would also ease pressure on goods like popcorn, where public frustration — and ridicule — has been focused. Fixing the khaini gap isn’t about raising more money from ordinary consumers. It’s about broadening the base by finally taxing what’s large, visible, and long overdue.

If India wants a fairer, broader, and more credible tax system, the place to start isn’t snacks. It’s by taxing what’s already on the table — but currently invisible.

- Saloni Khanna is an Educationist, Economist and Interviewer