GST Rate

Impact of GST Rate on the Tobacco Industry – GST on Cigarettes, Pan Masala and Gutkha

Overview

Ever since the implementation of the Goods and Services Taxes (GST), a constant need has been felt to increase the taxes on tobacco products in order to curb their usage; aggressive strategies were adopted to hike the prices of tobacco products by placing a higher incidence of tax on tobacco products. This has also resulted in generating thousands of crores of revenue for the government, and despite these heavy levies, the tobacco industry continues to be a booming industry and has been one of the major revenue generators for the Indian economy. But does this all bother a person when he steps out to light a cigarette? Probably not! In this article, we will see what are the various levies on tobacco products are, what are the recent changes made, and how they are going to impact the consumers and the tobacco industry in general.

Why is Tobacco taxed?

According to the WHO Report on Tobacco, India is the second largest consumer and producer of tobacco, as the tobacco products are available in the Indian Markets at abysmally low prices, making it a worldwide hotspot for mouth cancers.

• As per the Global Adult Tobacco Survey India-2016-2017, nearly 267 million adults over the age of 15 years in India, which accounts for 29% of all adults, are tobacco users, consuming this health hazard either in the form of Gutkha, Betel, Zarda, etc. (referred to as smokeless tobacco products) or smoking it up in the form of hookah, Cigarettes, Bidi, etc.
• According to the World Health Organization, Regional Office for South-East Asia WHO Factsheet 2018, over 1 million adults die every year in India due to tobacco use, which accounts for 9.5% of overall deaths.
• Furthermore, Tobacco not only poses a threat to our health but also has a high social and economic cost. As per the same report, the total economic costs attributed to tobacco use from all diseases in India in the years 2017-2018 for persons aged 35 years and above amounted to USD 27.5 billion.

In light of these alarming health and economic costs, taxing tobacco products is one of the most effective ways to bring down tobacco consumption and use in India, as the same will make it costlier to afford. However, these taxes on Tobacco are not regularly adjusted to Inflation and vary across the different tobacco categories. For instance, Bidis are not highly taxed and are thus easily affordable by the masses, and have a larger market in India.

Apart from the motivation to save lives and the health of the common man, another factor for placing taxes on tobacco products is to generate revenue. The revenue generated from taxing these tobacco products may, after all, be used for implementing and funding tobacco control and prevention programs. 

Taxes on Tobacco Industry

Tobacco, which is considered a ‘sinful good’, bears the burden of numerous tariffs and is already subject to Central Excise Duty, National Calamity Contingent Duty (NCCD), GST, and Compensation Cess in order to make it expensive for consumption. The logical corollary behind this is that the more the cost, the lesser the consumption will be, and hence, this is done in order to discourage the masses from consuming this injurious substance. Much of the government’s revenue is also spawned from the tax imposed on tobacco products. However, these taxes haven’t proved adequate to reduce tobacco consumption in the country. 

GST on the Tobacco Industry

As per the WHO guidelines ¹, a minimum of 75% tax burden should be placed on all tobacco-based products, which is not the case in India, and thus, Tobacco continues to be an intractable public health problem for India.

GST Rate for Tobacco Products

With the advent of the Goods and Services Tax (GST) in 2017 in India, all Tobacco products were charged with the highest tax slab rate of 28%, and the compensation cess was charged only on Cigarettes and smokeless tobacco products.

Other Levies on Cigarettes and Tobacco Products

 Apart from the 28% tax rate of GST, a compensation cess is levied under the GST Regulations on cigarettes and tobacco products. Additionally, under the Excise Laws, National Calamity Contingent Duty (NCCD) is also levied on these tobacco products.

GST Compensation Cess Rate on Cigarettes

Cigarettes up to 65mm in length	Cigarettes between 65mm and 70mm	Filter cigarettes up to 65mm in length	Filter cigarettes between 65mm and 70mm	Filter cigarettes between 70mm and 75mm	Other Cigarettes
5% + Rs. 2076/ thousand units	5% + INR 3688 / thousand units	5% + INR 2076 / thousand units	5% + INR 2747 / thousand units	5% + INR 3668 / thousand units	5% + INR 4170 / thousand units

GST Compensation Cess Rate on Various Other Tobacco Products

Chewing Tobacco (without lime tube)	Chewing Tobacco (with lime tube	Filter Khaini	Jarda	Gutkha	Pan Masala (containing Tobacco)
160%	142%	160%	160%	204%	204%

 Changes in the National Calamity Contingent Duty (NCCD) and its Impact

• With 28% as the GST rate, which falls short of the WHO guidelines on taxing tobacco products, there have been constant deliberations in the country to place a higher tax burden on tobacco products. Public health advocates have urged the GST Council to increase the levies on tobacco-related products in order to prevent and discourage the younger generation from abusing tobacco products. Even though tobacco products had been placed in the highest tax slab under GST in 2017, this hasn’t proved sufficient as the cost of these tobacco products hasn’t been adjusted with Inflation, thereby making these tobacco products affordable as opposed to the initial goal of making them costly.
• Recently, in the Budget 2023, it was proposed that the National Calamity Contingent Duty (NCCD) be increased by 16%. NCCD is a surcharge, which means it will be levied in addition to the GST imposed and Excise duty levied. It also works as a ‘sin tax’, which is basically levied on a product with the intention of discouraging its consumption, such as Alcohol. Currently, with the imposition of GST, NCCD, and the compensation cess, the overall tax on cigarettes amounts to around 52%.
•  However, it is noteworthy that this hasn’t been proposed to be applicable to all tobacco products. In fact, smokeless cigarettes, chewing Tobacco, and bidis have been exempted from this, and no additional cess has been proposed to be levied on them. They are, as usual, subject to the 28% GST rate, which has been made effective since 2017, and no revisions have been made in the cesses levied on them since then. This raises a question as to why the most commonly used tobacco products have been kept out of these revisions if the incentive behind these pecuniary burdens is to keep these health hazards out of the financial reach of the common man.
• Furthermore, the proposed increase in the National Calamity Contingent Duty (NCCD) is facing criticism for the reason that it will barely make any changes in the prices of tobacco products and will hardly affect the overall consumption levels. Thus, a common man who already has the propensity to buy a whole cigarette pack wouldn’t be spending exorbitantly after this 16% hike in duty, as this will be equivalent to an increase of less than a rupee per cigarette stick, and the cigarette manufacturing companies can also easily manage and absorb the shock of increase in overall prices, which will be negligible and thus keeping the sales unaffected.
• It must further be noted that NCCD amounts only a smaller part of the overall levies placed on Tobacco, accounting for a mere 10%, whereas GST accounts for 90% of the tobacco tax. Therefore, GST has made tobacco products only marginally expensive as they still continue to be affordable in India, and the recent changes proposed, especially in NCCD, will barely affect the overall prices and will bring a negligible change in the sales of the manufacturers or the tobacco using habits of people.

Impact of Capping of the GST Compensation Rate for Certain Tobacco Products

• Additionally, the Union Government has capped the maximum rate of GST Compensation Cess, which is to be levied on pan masala, cigarettes, and other tobacco products, and has linked it to their retail sale price. As a part of Amendments to the Finance Bill of 2023, the maximum GST Compensation Cess Rate for the aforementioned products will be 51% of the retail sale price for pan masala, as opposed to the current cess charged at 135% ad valorem, and 100% of the retail price per unit for Tobacco and manufactured tobacco substitutes, as opposed to the previously charged rate of 290%.
• Therefore, the key change is that the cess will now be applied to the maximum retail price as opposed to the actual sale price. This amendment is expected to enable the GST Council to introduce applicable tax rates and will bring a significant shift in the taxation regime imposed on tobacco manufacturers. Though reverting from an economic point of view, this capping is meant to thwart tax fraud and tax evasion and, therefore, boost tax collection.

Conclusion

The advent of GST has increased the complexity of the tax regime to be followed, even by the tobacco industry, and the recent amendments in the compensation cess and National Calamity Contingent Duty (NCCD) have further stirred the debate around whether these tax slabs and other levies need to be revised even more regularly to protect revenue and keep the prices from falling.

FAQs

1. https://www.who.int/publications/who-guidelines