GST on cigarettes, tobacco products may be raised, ETCFO
India could consider raising goods and service tax on cigarettes and other tobacco products once it stops levying a compensation cess on these items.
Cigarettes and other tobacco products currently face GST of 28% besides the cess and other levies, taking the total indirect tax to 53%. One of the suggestions being explored is to raise the GST to the highest permissible 40% and top that with an additional excise duty.
The idea is to ensure that the tax revenue on these products does not fall once levying of the compensation cess ends, now scheduled for March 31, 2026. The government is not keen to replace the compensation cess with another cess, officials said.
A ministerial panel mandated by the GST Council to look into the future of the compensation cess beyond 2026 is expected to deliberate on these issues, they said.
Cess is not considered efficient, one official said. The panel is expected to consider all options before submitting its report. The GST Council will then take a final decision on the recommendations.
Considered sin goods, cigarettes and other smokeless tobacco products currently face the compensation cess, basic excise duty and the National Calamity Contingent Duty besides GST at 28%.
But even the overall taxation of 53% – GST plus other levies – on cigarettes is still way below the 75% rate recommended by the World Health Organization.
Tobacco and tobacco products including cigarettes and pan masala are a significant contributor to the governments’ tax revenue – these generated tax revenues of ₹72,788 crore in 2022-23.
“Another option on the table is that of replacing the compensation cess with a health cess, but a few states are not in favour … the Centre is also in principle not in the favour of bringing a new cess,” the official added.
The compensation cess is levied at 5% on products such as cigars and cigarettes. It is then topped with an additional specific levy of ₹2,076 to ₹4,170 per thousand cigars or cigarettes, depending on their length, filter and whether they are flavoured or not.
The GST Council had set up a group of ministers (GoM) on tobacco taxation under the then Odisha finance minister Niranjan Pujari.
The GoM had suggested a revision in the cess element of the GST, which it said must be linked to a product’s maximum retail price rather than the sales value.
The issue, subsequently, was referred back to a fitment committee and the GoM on rate rationalisation.
The council, separately, also asked the GoM on compensation cess to look at tobacco taxation, taking into account both scenarios: merging the cess with the existing slab and or levying of any other cess.
