The Centre is planning to impose an additional levy over the 40 percent GST on tobacco and related products, once the compensation cess ceases to exist, said two government officials.
At present, the GST Council has decided to continue with the current GST rate structure, which includes a levy of 28% GST along with cess, for tobacco and related products. The present structure will continue till November-December, until the compensation cess liabilities are fulfilled.
For most tobacco products, at the moment, the overall tax incidence is in the range of 52 to 88 percent.
Officials said, once the compensation cess expires, an additional levy will be imposed on these products to keep the tax incidence the same as it is currently. However, what the additional levy will be is not yet decided, they said.
On Wednesday, the Council recommended that Pan Masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco, and bidi will continue at the existing rates of GST and compensation cess where applicable, till loan and interest payment obligations under the compensation cess account are completely discharged.
The Union Finance Minister may then decide the actual date of transition to the revised rates of GST approved by the Council for the above-mentioned goods, it said.
The compensation cess, introduced in July 2017, was designed initially to make up for state revenue losses during the initial five years of GST implementation.
The GST (Compensation to States) Act, 2017 was enacted to ensure that the Centre would provide compensation to states -- for a period of five years from the implementation of GST (July 1, 2017) -- to make sure that each state's tax revenue grows by 14 percent annually over a base year of 2015-16.
The legal window for compensation ended in June 2022, but the levy was extended until March 2026 to service loans raised during the pandemic years when revenues sharply declined.
On Thursday, Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal told Moneycontrol that the government feels the compensation cess liabilities will end by November-December. "I don’t think there will be any surplus amount left (after repayment). If at all there is, it will be distributed between the Centre and the states," Agarwal noted.
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