Centre may introduce Bill in winter session to replace tobacco GST cess

New levy could follow full repayment of GST compensation loans, keeping overall tax incidence on tobacco products high

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The Union government is considering introducing a bill during the winter session of Parliament to impose a new levy on tobacco and related products, replacing the existing GST compensation cess, according to a report in the Economic Times.

 

The current compensation cess is levied on top of the 28 per cent GST rate on products such as cigarettes, pan masala, gutkha, chewing tobacco including zarda, unmanufactured tobacco, and bidi. It may continue for at least three more months to allow the government to fully repay loans taken to compensate states for revenue losses following the rollout of the GST regime eight years ago.

GST rates, compensation levy to continue

The GST Council, headed by Finance Minister Nirmala Sitharaman, recently decided to retain the GST rates and compensation cess on these tobacco products until the loans are fully repaid. Once that is done, the GST rate on these sin products will rise to 40 per cent, the highest bracket, while the compensation cess will be withdrawn. 

 

Currently, these products face the highest GST rate of 28 per cent along with compensation cess, central excise duty, and national calamity contingent duty, bringing total indirect tax liability to 53 per cent.

 

According to Economic Times, the compensation cess may then be replaced by another form of levy to ensure that the overall indirect tax burden on tobacco products remains at current levels.

Timeline, repayment considerations

The initial deadline to end the compensation cess was set for October 31, based on average monthly collections of roughly ₹10,000 crore. However, with high-end cars, coal, and aerated drinks exempted from the compensation cess starting September 22, the pace of loan repayment will slow.

 

“This gives the government additional time to evaluate options for replacing the cess while maintaining the overall tax incidence,” the report cited a source saying.

 

The winter session of Parliament is expected to begin in late November or early December, providing a potential window for the introduction of the proposed tobacco levy bill.