GST Council Defers Tax on Tobacco and Pan Masala to 2025

The Goods and Services Tax (GST) Council has approved a two-slab system with a 40% tax on sin and luxury products, but tobacco and related products, such as pan masala and cigarettes, will remain under the existing GST plus compensation cess regime for now. The rest of the tax overhaul will go live from September 22, 2025.

The Goods and Services Tax (GST) Council has approved a significant overhaul of the tax structure, moving towards a two-slab system with a 40% tax on sin and luxury products. The new structure aims to simplify the tax regime and boost government revenue by discouraging the consumption of harmful goods. The changes, expected to take effect from September 22, 2025, will streamline the tax system and address concerns related to the current four-slab structure.

The GST Council, chaired by Union Finance Minister Nirmala Sitharaman, has decided to reduce the tax burden on common household items. The new structure will feature a 5% and 18% tax rate for most goods, while sin and luxury products will be taxed at a 40% rate. This move is expected to lower the tax incidence on a host of household goods, potentially reducing it by 12-15% [1].

The Council has also approved raising taxes on sin goods to 40%, as part of the broader GST 2.0 overhaul. The new 40% slab will include tobacco products such as pan masala, gutkha, cigarettes, chewing tobacco, and others. However, these products will continue under the existing GST plus compensation cess regime until the Compensation Cess loans are fully discharged [3].

The GST Council’s decision to reduce the tax burden on common household items is a significant step towards making the tax system more consumer-friendly. The move is expected to benefit the common man by reducing the overall tax incidence on everyday goods. The Council will also consider ending the compensation cess levied on items in the 28% bracket, further simplifying the tax structure [1].

The new tax structure is part of the government's broader strategy to address the fiscal challenges posed by the GST. The current four-slab structure has been criticized for its complexity and the high tax rates on certain items. The two-slab structure aims to address these issues by simplifying the tax regime and making it more efficient [1].

However, the move has faced opposition from some states, which have demanded compensation for the potential revenue loss. Opposition-ruled states have proposed that the GST Council levy an additional duty on sin and luxury goods to maintain the current tax incidence. They have also demanded that the base year for calculating revenue protection be fixed as 2024-25 [2].

The GST Council will consider these demands at its next meeting. The Council is the apex decision-making body for the indirect tax, rolled out eight years ago. India adopted a 4-tier GST structure with 5%, 12%, 18% and 28% on July 1, 2017, when the Centre and states agreed to subsume most of their taxes into one single levy. A compensation cess in the range of 1% to 290% was brought in on luxury and demerit goods to compensate states for any loss of revenue in the transition [1].

The Council's decision to raise the tax on sin goods to 40% is expected to generate additional revenue for the government. The revenue collected from these taxes can be channeled into welfare programs, reinforcing the tax’s role in reducing consumption and supporting social initiatives. The 40% club and what’s in it includes tobacco and related products, sugar-sweetened beverages, luxury vehicles, junk foods, and other high-taxed items [3].

The new tax structure is expected to have a significant impact on the tobacco industry. Corporates like ITC Ltd, which derive a significant portion of their net profit from cigarettes, will be affected by the new framework. The consumer price of ITC’s cigarettes comprises 55% tobacco taxation, 12% channel margins, and 23% EBIT margin. Investors have long been jittery over regulatory uncertainty, stake sales by British American Tobacco (BAT), and the impact of the new tax structure on the tobacco industry [3].

In conclusion, the GST Council’s decision to approve a two-slab system with a 40% tax on sin and luxury products is a significant step towards simplifying the tax regime and addressing the fiscal challenges posed by the GST. The new structure is expected to benefit the common man by reducing the overall tax incidence on everyday goods. However, the move has faced opposition from some states, which have demanded compensation for the potential revenue loss. The Council will consider these demands at its next meeting.

References:
[1] https://economictimes.indiatimes.com/news/economy/policy/fitment-panel-clears-two-slab-gst-structure/articleshow/123664265.cms
[2] https://www.business-standard.com/india-news/oppn-states-demand-compensation-for-revenue-loss-due-to-gst-reform-proposal-125082900521_1.html
[3] https://m.economictimes.com/news/economy/policy/gst-council-will-now-charge-highest-tax-on-these-goods/articleshow/123681276.cms