The government may increase the Goods and Services Tax (GST) on cigarettes and other tobacco products, according to a report by The Economic Times (ET). This change could happen once the government stops levying the compensation cess on these products.
Currently, cigarettes and other tobacco products attract a GST of 28% along with various other levies, taking the total tax burden to 53%. One of the options being considered is to increase GST to 40%, which is the highest permissible slab, and add an excise duty on top of that.
The main aim is to ensure that the tax revenue from tobacco products does not fall after the compensation cess ends in March 2026. Officials told ET that the government does not want to introduce a new cess to replace the existing one.
A ministerial panel under the GST Council is reviewing this issue and is expected to submit its recommendations before a final decision is made.
Tobacco products are considered “sin goods,” which means they are taxed heavily to discourage consumption. The current taxation on cigarettes in India is 53%, which is lower than the 75% recommended by the World Health Organization (WHO). Tobacco and tobacco products generate huge tax revenues. In 2022-23, they contributed Rs 72,788 crore to government earnings.
Officials told ET that multiple taxation options are being considered. One option is to raise GST to 40% and add an excise duty to maintain tax revenue. Another option is to replace the compensation cess with a health cess, though some states and the central government do not support this idea.
The compensation cess on tobacco products is currently 5%, along with an additional specific levy of Rs 2,076 to Rs 4,170 per 1,000 cigars or cigarettes, depending on their length, filter, and flavour.
The GST Council had earlier set up a Group of Ministers (GoM), led by the then Odisha Finance Minister Niranjan Pujari, to review taxation on tobacco products.
The GoM recommended changing the cess structure, suggesting that it should be linked to a product’s maximum retail price (MRP) instead of the sales value. This proposal was later referred to a fitment committee and the GoM on rate rationalisation for further discussion.
The GoM on compensation cess was also asked to examine tobacco taxation, considering two possible solutions. One suggestion was to merge the cess with the existing tax slab. Another proposal was to introduce a new type of cess.
The final decision on whether to increase GST on cigarettes or introduce a new excise duty will be taken by the GST Council after reviewing the recommendations of the ministerial panel