Critical Reasoning: Cigarette Taxation

CAT 1999 Slot 1 · VARC · Medium · Verbal Ability

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Cigarettes constitute a mere 20 per cent of tobacco consumption in India, and fewer than 15 per cent of the 200 million tobacco users consume cigarettes. Yet these 15 per cent contribute nearly 90 per cent 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 of the following best bolsters the conclusion that reducing duties will expand the tax base?

  1. A.

    The cigarette manufacturers' association has decided to indulge in aggressive promotion.

  2. B.

    There is a likelihood that tobacco consumers will shift to cigarette smoking if cigarette prices were to reduce.

  3. C.

    The cigarette manufacturers are lobbying for a reduction on duties.

  4. D.

    An increase in duties on non-cigarette tobacco may lead to a shift in favour of cigarette smoking.

Answer

B

Explanation

If lowering taxes reduces prices and causes non-cigarette tobacco users to switch to cigarettes, the tax base of cigarette smokers will expand.

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