No extra GST on tobacco; Centre plans new levy as cess period nears end

The Centre has decided not to raise the Goods and Services Tax (GST) on tobacco products but will introduce a new central levy to keep the overall tax burden unchanged, Moneycontrol reported. The move comes as the GST Compensation Cess regime nears its expiry, prompting the government to look for alternative revenue measures from high-tax items such as tobacco.

 

The news report quoted a senior government official as saying that there are no plans to increase the GST rate on tobacco and related products. Another official added that the Centre will ensure the effective tax burden on these products remains unchanged, even after the compensation cess period ends.   

 

Tobacco attracts highest GST rate

 

The GST Council, chaired by Finance Minister Nirmala Sitharaman, has introduced a separate tax category for sin goods such as pan masala, cigarettes, chewing tobacco, unmanufactured tobacco, and bidis. These products will now attract a higher GST rate of 40 per cent, above the standard rates applied to other goods.

 

Tobacco products currently fall under the highest GST slab of 28 per cent, along with a compensation cess that varies depending on the product type, taking the effective tax incidence above 40 per cent. The cess, which was introduced to make up for states’ revenue losses after the launch of GST, will remain until the Centre clears loans taken to fund state compensation during the pandemic years.

 

The compensation cess, introduced in 2017, was originally meant to end in 2022 but was extended until 2026 to help the Centre repay loans taken during the pandemic.

 

No major revenue loss expected

 

Officials believe the Centre will not face a significant revenue dip, as consumption levels are improving and compliance under GST has strengthened.

 

The tax incidence on tobacco is around 53 per cent and about 88 per cent on pan masala. Even if the GST rationalisation appears to lower collections, improved compliance and higher consumption will make up for it, an official told Moneycontrol.   

 

What will change after 2026?

 

After the cess expires, the Centre plans to impose a new central levy outside the GST system to ensure that tax collections from tobacco remain stable. While this may not cause an immediate price hike, consumers are unlikely to see any reduction in costs either, the news report said.