40% GST slab: Cess backlog hits cigarette, aerated drink distributors

Federation writes to FinMin, says 40% GST move straining liquidity

Distributors have written to the Ministry of Finance over the accumulation of cess on aerated drinks and cigarettes, saying the shift to a 40 per cent goods and services tax (GST) rate is creating a liquidity crunch in the supply chain.

 

In the old GST regime, both items were taxed under the 28 per cent slab plus a 12 per cent compensation cess. They now fall under a flat 40 per cent rate. However, the cess component on previously purchased stock has created a large pool of unutilised input tax credit (ITC), the distributors pointed out.

 

According to the All India Consumer Products Distributors Federation (AICPDF), this has resulted in a significant blockage of working capital for distributors and retailers of soft drinks and cigarettes across India. The cess credits cannot be offset against the new GST liability, effectively locking up funds and straining liquidity.

 

While the GST rate has been adjusted, the final consumer price remains the same. In his Independence Day speech, Prime Minister Narendra Modi had announced GST reforms as a Diwali gift to reduce the tax burden on the common man. On September 3, the government scrapped 12 per cent and 28 per cent slabs, and reclassified many items under the 5 per cent, 18 per cent, and 40 per cent GST brackets. 

 

“This situation is threatening business viability for many small and medium distributors who operate on thin margins and depend heavily on cash flow rotation. Retailers too are under pressure, as blocked capital directly impacts their ability to reinvest in fresh stock and sustain operations,” AICPDF said in its letter.

 

The federation has urged the government to allow refunds or utilisation of the accumulated cess ITC and provide transitional provisions to ease the financial stress on the trade. It has also requested special transitional provisions for soft drink and cigarette distributors and retailers to help the industry adjust smoothly to the new tax structure.

 

In the letter, the trade body also urged the government to consider holding consultations with industry representatives and associations like AICPDF to work out practical solutions and avoid long-term distress in the sector.

 

“The matter is urgent,” the letter said. “The upcoming festival season will further strain working capital if the accumulated cess remains unutilised.”