The government could also hike the Goods and Services Tax (GST) on tobacco and cigarette products within a few weeks, based on a report presented by The Economic Times (ET). The measure is under discussion because the cess on tobacco items will have to be eliminated over March 2026.
Administrators recommend the foremost motive behind it is that they don’t need to levy an added cess to uphold revenue.
Currently, tobacco products and cigarettes are charged 28 per cent GST, plus other charges that aggregate to a tax of 53 per cent. One of the suggestions in consideration is hiking the GST to 40 per cent, the maximum allowed slab, and also introducing an excise duty in order to keep the overall level of taxation.
Ongoing Deliberations and Alternatives
A ministerial group under the GST Council is looking at multiple tax options with proposals to come in before it goes for the final call. The option in discussion is shifting from the cess of compensation to a health cess, though so far this idea hasn’t met too much applause with all the states or even the central government.
Tobacco as a ‘Sin Good’
Tobacco items are classified as “sin goods” and are taxed heavily to discourage consumption. The present tax rate of 53 per cent is also less than the 75 per cent suggested by the World Health Organization (WHO). Tobacco taxes have been a major contributor to the government coffers, bringing INR 72,788 crore in the financial year 2022-23.
Role of the GST Council
The GST Council had already constituted a Group of Ministers (GoM) earlier, which was headed by erstwhile Odisha Finance Minister Niranjan Pujari, to discuss taxation on tobacco. The GoM proposed revamping the cess as a percentage of the maximum retail price (MRP) of a product rather than sales value. The same was later put into reference with a fitment committee and another GoM on rate rationalisation for study.
In addition, the GoM on cess compensation was also assigned to consider two possible solutions: merging the cess into the existing tax system or establishing a new form of cess. The ultimate decision on any hike in GST on cigarettes or imposition of an excise duty will be taken after the ministerial panel reports its recommendations to the GST Council.
Since the contribution of tobacco taxation to the government’s exchequer is substantial, modifications in the rates of GST or cess structures would have significant monetary and industry-wide implications. The coming months would be critical in determining the taxation regime for tobacco products in India in the future.
