Lok Sabha passes Bill to levy excise duty on tobacco

Lok Sabha

Lok Sabha on Wednesday passed a law to levy a higher excise duty on tobacco and related products once the GST compensation cess ends.

The Bill, once enacted, will give the government the fiscal space to increase the rate of central excise duty on tobacco and related products after GST compensation cess, which is currently levied on all tobacco products like cigarettes, chewing tobacco, cigars, hookah, zarda, and scented tobacco, ceases to exist.

Currently, a 28 per cent Goods and Services Tax (GST) plus cess at a varied rate is levied on tobacco and related products.

The Bill seeks to substitute the table containing the tariff rates of tobacco and tobacco products in Section IV of the Fourth Schedule to the Central Excise Act, 1944.

The bill proposes to levy an excise duty of 60-70 per cent on unmanufactured tobacco. Excise on cigars and cheroots is proposed at 25 per cent or Rs 5,000 per 1,000 sticks, whichever is higher.

Cigarettes, depending on length and filter, are proposed to be taxed in the range of Rs 2,700-Rs 11,000 per 1,000 sticks, while chewing tobacco is taxed at Rs 100 per kg.

When GST was introduced on July 1, 2017, the rates of Central Excise duties on tobacco and such products were reduced significantly to allow for the levy of compensation cess without a large impact on their tax incidence.

Compensation cess levied on tobacco and tobacco products will be discontinued once interest payment obligations and loan liabilities under the compensation cess account are completely discharged. " Finance Minister Nirmala Sitharaman said in the Lok Sabha: "In another, probably, couple of weeks the loans will be completely repaid. The Centre, therefore, wants to make sure that the excise will come back to us so that we can levy the duty".

At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for five years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.

The levy of compensation cess was later extended by four years till March 31, 2026, and the collection is being used to repay the Rs 2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period.

(With PTI inputs)