Cigarette Prices Set To Go Up? Government Likely To Hike GST On Tobacco Products

New Delhi: The government may raise the Goods and Services Tax (GST) on cigarettes and other tobacco products, According to a report by the Economic Times. This potential increase could take place once the government ends the compensation cess currently being applied to these items.

Proposal to Increase GST to 40%

Currently, cigarettes and other tobacco products are taxed at 28 per cent GST, along with additional levies that bring the total tax burden to 53 per cent. One proposal being considered is to increase the GST to 40 per cent, the highest allowed rate, while introducing an excise duty to keep the overall tax burden the same.

Ensuring Stable Tax Revenue Post-Cess

The main goal is to ensure that tax revenue from tobacco products remains stable after the compensation cess ends in March 2026. Officials told ET that the government prefers not to introduce a new cess to replace the current one. A ministerial panel under the GST Council is currently reviewing the matter and is expected to submit its recommendations before a final decision is made.

Current Tobacco Tax Rates Below WHO Recommendations

Tobacco products are considered "sin goods" and are taxed heavily to discourage consumption. However, India’s current tax rate of 53 per cent is still much lower than the 75 per cent recommended by the World Health Organization (WHO). Despite this, tobacco-related taxes bring in significant revenue, contributing INR 72,788 crore to government earnings in the 2022-23 financial year.

GoM’s Recommendations on Tobacco Tax Structure

The GST Council had earlier assigned a Group of Ministers (GoM), headed by former Odisha Finance Minister Niranjan Pujari, to review the tax structure for tobacco products. The GoM recommended that the cess be based on a product’s maximum retail price (MRP) instead of its sales value. This suggestion was then passed on to a fitment committee and a separate GoM focused on rate rationalisation for further assessment.

The GoM on compensation cess was also tasked with exploring two options: either merging the cess into the current tax structure or creating a completely new type of cess. A final decision on raising GST on cigarettes or introducing an excise duty will be made once the ministerial panel presents its recommendations to the GST Council.

Tobacco taxes are a major source of government revenue, so any adjustments to GST rates or cess structures will have a big impact on both finances and the industry. The next few months will be key in shaping the future tax system for tobacco products in India.