The tobacco industry is a controversial yet extremely profitable business option, as evident by the success of companies such as ITC. However, the government tries its best to help citizens become aware of the adverse health effects of tobacco. India is also the world’s second-largest consumer of tobacco, with 275 million users. Recently, the introduction of the GST registration has had an impact on the tobacco industry. But, how exactly does GST registration play a role in shaping our tobacco industry? In this article, we will take a look at how GST registration has changed the status of tobacco products in India.
What is the GST registration?
During the past decade, India followed a separate system of taxation wherein State and Central governments had various sub-taxes and indirect taxes. However, the government decided to implement GST registration to make the system more organised and easy to monitor. As per the GST system of taxation, all other subsidiary taxes, CESS, charges and excise charges come under one form of tax. The Goods and Services Tax, better known as the GST, has therefore transformed our taxation infrastructure.
Impact of GST on Tobacco
Since introducing GST registration, excise duty on tobacco and tobacco products have been revised several times. However, as per the initial guidelines, locally manufactured bidis were exempted from GST taxation. The GST Council then later announced the GST tax rate on tobacco and tobacco-related products. As a result, the rates on various tobacco-related products vary in India. For instance, under the excise regime, Bidi enjoys the lowest rate at 22%, with chewing products having the highest at 81%. Cigarettes fall mid-way in this scheme with the tax rate being 64%.
Health Issues and Taxation
As you can see, GST registration and implementation have helped India generate a lot of revenue from tobacco products. However, the WHO believes that countries should enforce an even higher tax rate to discourage people from using such products. As per experts at the WHO, the preferable tax rate for tobacco and tobacco-related products is a whopping 75%. A lot of activists and health professionals have been campaigning and demanding a higher tax burden on such products to discourage their use. Hence, under the GST regime, there is an additional CESS on such products which have a tax rate of 28%.
Taxes on Tobacco Products
When the GST registration rolled out in 2017, tobacco and related products fell into the highest bracket of 28%. Additionally, such products also attracted Compensation CESS that depended on their size or length, as shown above. Furthermore, all cigarettes attracted an ad valorem worth 5%, with the ones longer than 75 mm, attracting a 36% ad valorem.
Similarly, tobacco products were liable to taxation under the National Calamity Contingent Duty, better known as the NCCD. Since that practice was continued post-GST, cigarette prices rose even further. However, even with these in place, the overall hike for cigarettes was as low as 0.18%, whereas the hike was more significant for rural products. For instance, bidis saw a spike of 8.8%, whereas smokeless tobacco witnessed a 6% hike. Later on, excise duty was reintroduced at a nominal rate of INR 5 per 1,000 sticks for cigarettes.
Tax Rates on Tobacco Products
Here’s a quick look at the taxes charged on cigarettes of varying sizes and other tobacco products under GST registration.
|Sl No||Particulars||Under 65mm||Between 65 and 70mm||Between 70 and 75mm||Above 75 mm||Pan masala||Pan+Gutkha|
|1||Value per unit||INR 5||INR 10||INR 15||INR 15||INR 5||INR 10|
|3||Max CESS value (INR)||0.25||0.50||0.75||0.75||3||20.4|
|4||CESS for 1000 sticks||INR 1.591||INR 2.876 (non-filter)
INR 2.126 (filter)
|INR 2.876 (both)||INR 4.170 (both)||Not applicable||Not Appl|
|5||GST Rate 28% (INR)||1.4||2.8||4.2||4.2||1.4||2.8|
|6||Probable Price in INR
Also, cigars and cigarillos will both be levied tax at 28%, and will also have an additional cess of up to 21%. Otherwise, they will have an additional price differential worth INR 4.170 per stick, whichever is deemed more fit. Chewing tobacco due to its hazardous nature will attract 28% GST, followed by an additional CESS amounting to a whopping 142%. In case the tobacco has a lime tube, the rate will be 142%, and for those, without such a tube, the rate will be as high as 160%.
Since the recent changes made to the process of GST registration did not lead to much changes in tax rates, the impact felt will be minimal. The declaration of 5% CESS is a lot lower than what was expected, leading to a lukewarm response from experts and the public in general. However, there will be a nominal increase in the prices of the products for smokers due to the rise in the price of cigarettes. Hence, the impact of GST registration in particular on the tobacco industry is relatively neutral.
Furthermore, changes can be made to the GST tax slabs only by the GST council. Hence, the duty falls on the Union government to raise the tax if need be. States such as Bihar, Delhi and Punjab have requested the Council to raise taxes on harmful products, such as cigarettes and aerated drinks to raise the revenue-collection efforts of the government during the pandemic. We will have to wait and see whether new legislation regarding GST registration or tax rate shifts will occur shortly. In case you have any queries regarding GST registration, do feel free to reach Vakilsearch.