Govt caps maximum GST cess rate on pan masala, tobacco; links rate to retail sale price

In February, the GST Council chaired by Union Finance Minister Nirmala Sitharaman and comprising state counterparts, had approved the report of a panel of state finance ministers on plugging tax evasion in pan masala and gutkha businesses.

The government has capped the maximum rate of GST compensation cess that would be levied on pan masala, cigarettes and other forms of tobacco and linked the highest rate to their retail sale price.

The capping of the cess rate was brought in as part of the amendments to the Finance Bill, 2023, which was passed by the Lok Sabha last March 24.

As per the amendment, the maximum GST compensation cess rate for pan masala will be 51 per cent of the retail sale price per unit. In the current regime, the cess is charged at 135 per cent ad valorem.

The rate for tobacco has been fixed at Rs 4,170 per thousand sticks plus 290 per cent ad valorem or 100 per cent of the retail sale price per unit.

So far, the highest rate was Rs 4,170 per thousand sticks plus 290 per cent ad valorem.

The cess is levied over and above the highest Goods and Services Tax (GST) rate of 28 per cent.

Changes in schedule-I of GST compensation cess Act, brought in via amendment in Finance Bill, has capped the maximum cess that can be charged on Pan masala and tobacco products.

Tax experts, however, said to ascertain the exact compensation cess applicable following this change, the GST council will need to issue a notification.

AMRG & Associates Senior Partner Rajat Mohan said the latest amendment in the GST Compensation cess law is an enabler that will permit the GST council to introduce applicable tax rates through a notification.

"This change marks a significant shift in taxation policy for pan masala and tobacco-supplying companies. Though this policy will arrest tax evasion to a great extent in this sector, it still may prove to be a regressive plan from an economic standpoint," Mohan said.

In February, the GST Council chaired by Union Finance Minister Nirmala Sitharaman and comprising state counterparts, had approved the report of a panel of state finance ministers on plugging tax evasion in pan masala and gutkha businesses.

The GoM had recommended that the mechanism for levy of compensation cess on pan masala and chewing tobacco be changed from ad valorem to a specific rate-based levy to boost the first stage collection of the revenue.