India govt considering to increase GST on cigarettes and tobacco products

The Centre is considering raising the Goods and Services Tax (GST) on cigarettes and other tobacco products once it stops charging the compensation cess, according to a report by The Economic Times.

 

Currently, these products are taxed at 28 per cent under GST, along with additional cess and other levies, bringing the total tax rate to 53 per cent. One option being explored is to increase the GST to 40 per cent—the highest permissible rate—and add an extra excise duty.

 

This change aims to ensure that tax revenue from tobacco products remains steady after the compensation cess ends on March 31, 2026. The government does not want to introduce a new cess to replace it, The Economic Times quoted officials as saying.

   

A panel of ministers set up by the GST Council is expected to review this issue and consider all options before submitting a report. The GST Council will make the final decision based on the recommendations.

 

Sin tax

 

Cigarettes and smokeless tobacco products are considered "sin goods" and currently face multiple taxes, including GST, excise duty, and the National Calamity Contingent Duty. However, the overall tax rate of 53 per cent is still much lower than the 75 per cent tax rate recommended by the World Health Organisation (WHO).

 

Tobacco products, including cigarettes and pan masala, are a major source of tax revenue for the government. In 2022-23, they contributed Rs 72,788 crore in taxes.

 

One alternative being considered is replacing the compensation cess with a "health cess," but some states and the central government are not in favour of this idea, an official told The Economic Times.

 

Currently, a 5 per cent compensation cess is applied to products like cigars and cigarettes, along with an additional specific levy of Rs 2,076 to Rs 4,170 per 1,000 cigarettes or cigars, depending on factors such as size and flavouring.

 

The GST Council had earlier formed a group of ministers (GoM) to examine tobacco taxation. The group suggested linking the cess to the product’s maximum retail price instead of its sales value. The issue was later referred to another committee for further review.

 

The GST Council has also asked another ministerial group to consider whether the cess should be merged with the existing tax slab or if another type of cess should be introduced.

 

India’s tobacco industry

According to reports, India has one of the biggest tobacco industries in the world, contributing significantly to the economy. It is the second-largest producer and third-largest consumer of tobacco. The industry provides jobs to around 45 million people, including farmers and workers.

 

Tobacco products in India include cigarettes, beedis, and smokeless tobacco like gutkha and khaini. While cigarettes make up only 10-15 per cent of total tobacco consumption, they generate over 80 per cent of tobacco tax revenue. Beedis, which are cheaper and more widely consumed, account for 85 per cent of tobacco use but contribute much less to tax revenue.

 

India is also a major exporter of tobacco, with Europe, the Middle East, and Southeast Asia being key markets.