The Goods and Services Tax (GST) Council headed by Finance Minister Arun Jaitley on Monday decided to increase the cess on cigarettes, giving out a strong message that any reduction in taxation on demerit goods will not be accepted.
The revision in the tax rate will lead to Rs 5,000 crore gain to the government on an annual basis.
In May, the Council had fixed the rate for the demerit goods — cigarettes — in the highest tax slab of 28 percent and a cess over and above the tax rate, which would ultimately go to the compensation kitty of the states.
The compensation cess had two components — an ad valorem of 5 percent and an increasing numerical amount and on each category of filter and non-filter cigarette.
While the 28 percent tax and an ad valorem at 5 percent will remain, the numerical value of cess on cigarettes will be increased from midnight, Jaitley said adding that the total revenue impact of this is expected to be Rs 5,000 crore.
“Now this rate (fixed by the fitment committee) when translated as a part of cost of the cigarette itself, indicated that the impact of the cascading effect has not been factored in. Therefore, it was resulting in a windfall profit for cigarette companies,” Jaitley said after the conclusion of the 19th GST Council meeting.
Rates have been changed for six categories of cigarettes. For non-filter cigarettes, not exceeding 65 mm, the rate has been increased to 5 percent plus Rs 2,076 per thousand sticks from existing rate of 5 percent plus Rs 1,591. Similarly, for filter cigarettes exceeding 65 mm length but not more than 70 mm, rate has been increased by Rs 621 per thousand sticks.
As noted by the fitment committee, the incidence taxation has come down under GST, as compared with the total tax in pre-GST regime, Jaitley said, adding that as per the current rate, cigarette companies can either reduce prices or transfer the “windfall profit to the balance sheet”.
“…This was never the intention of the Council. Since we have a self correcting mechanism in the Council itself, we noticed it,” Jaitley explained.
Under GST, the states will receive provisional compensation from Centre for loss of revenue due to abolition of taxes such as VAT (value added tax), octroi and implementation of GST. The Council had decided that the compensation would be met through levy of a 'GST Compensation Cess' on luxury items and sin goods like tobacco, for the first five years.“More than the tactical move on increasing the cess for tobacco products, GST council meeting shows the inclination and flexibility to take quick decisions. One would hope that few other issues such as GST rate on existing car leases, ambit of registered trade mark for taxation of packed food products etc are addressed in the next meeting,” Pratik Jain, Partner and Leader Indirect tax - PwC India said.