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The Centre is planning to introduce an additional levy, such as a cess, on tobacco products like cigarettes, gutkha, or chewing tobacco to maintain the existing tax burden on these sin goods, while avoiding any increase in GST, according to a report by Moneycontrol. The plan comes ahead of the end of Compensation cess regime under GST 2.0 on certain products including sin goods. According to MC report quoting an official, no additional GST on tobacco and related items will be imposed. The tax incident will be kept the same using an additional central tax levy, the MC report added. Officials as quoted by MC said that with consumption picking up and GST rates on luxury and sin goods already raised from 28% to 40%, the Centre does not anticipate any major revenue loss for states. Therefore, it is expected to depend on fiscal measures outside the GST framework to maintain revenue from demerit goods like tobacco and pan masala. The 56th GST Council announced to remove compensation cess on sin goods in a phased manner until the remaining liability of the back-to-back loans taken by states for revenue losses is met. GST Reforms Shift Tobacco Products In 40% Sin Slab The GST Council, led by Finance Minister, Nirmala Sitharaman, has created a special tax slab for sin goods like Pan Masala, cigarettes, chewing tobacco products like zarda, and unmanufactured tobacco and bidi. These goods will attract 40 per cent GST (Goods and Services Tax), higher than other products. At present, tobacco and related products have attracted a 28 per cent GST along with cess, taking the effective tax incidence in the range between 52 to 88 per cent. The fear grows that the new tab structure on tobacco and related products will lead to a fall in states’ revenue, once the compensation cess ends. As of now, the GST Council has kept the current GST rate structure of 28% GST along with cess for tobacco and related products. It will continue till November-December, until the compensation cess liabilities are fulfilled. Compensation Cess Extends To Finance Revenue Loss During Pandemic When the GST act was implemented in 2017, the government added a compensation cess provision with these products for five years to safeguard the states’ revenue being hit by the new indirect tax system. Later, the compensation cess was extended until March 2026 to compensate service loans these states raised during the pandemic years when revenues sharply fell.
