India May Raise GST on Tobacco Products After Compensation Cess Ends

India is considering increasing the Goods and Services Tax (GST) on tobacco products, including cigarettes and pan masala, following the planned discontinuation of the compensation cess. The proposal, still under review, aims to maintain the revenue generated from these products after the compensation cess expires on March 31, 2026.

Tobacco’s Significant Contribution to Tax Revenue

Tobacco products play a crucial role in India’s tax collection, with the government earning ₹72,788 crore in the fiscal year 2022-23. Currently, these products are taxed at 28% GST, plus a compensation cess and additional levies, bringing the total indirect tax rate to 53%. However, with the cessation of the compensation cess in 2026, authorities are exploring other options to ensure continued tax revenue.

Proposal to Increase GST and Add Excise Duty

One option under consideration is raising the GST on tobacco products to 40%, the highest allowable rate, while introducing additional excise duties. This approach aims to fill the revenue gap created by the cessation of the compensation cess. The objective is to avoid introducing another cess, as it is not viewed as an efficient taxation method.

Replacing the Compensation Cess

Currently, tobacco products are subject to a variety of taxes, including the 5% compensation cess, basic excise duty, National Calamity Contingent Duty, and 28% GST. However, the combined tax rate of 53% remains well below the World Health Organization’s recommended rate of 75%. Officials have noted that while a health cess is being considered, both state and central governments are hesitant about implementing a new cess structure.

Government Groups Assessing Tobacco Taxation

A ministerial group appointed by the GST Council is tasked with analyzing the future of tobacco taxation after the compensation cess expires. This group, led by former Odisha finance minister Niranjan Pujari, has already suggested changes to the cess system. One recommendation is to base the GST cess on a tobacco product’s maximum retail price rather than its sales value.

The group has also considered two possibilities for the future: incorporating the cess into the existing GST slab or replacing it with an alternative cess system.

Looking Ahead

As discussions continue, India’s approach to tobacco taxation could change significantly in the coming years. The government aims to balance maintaining tax revenue with addressing health concerns associated with tobacco use. Whether or not the GST hike and excise duties will move forward remains to be seen, but the importance of tobacco products in tax revenue ensures that any changes will be closely monitored.