Government Mulls Additional Levy on Tobacco Products, Tax Burden to Remain Unchanged
The Indian government is exploring options to impose an additional levy on tobacco products, including cigarettes, cigars, chewing tobacco, and gutka. Two primary options under consideration are adjusting Central Excise Duty or introducing a new Health Levy. The implementation is expected in the fourth quarter of the current fiscal year. Current tax rates on tobacco products vary widely, with some items taxed at 60-80% and products like gutka facing rates of 160-200%. Finance Minister Nirmala Sitharaman confirmed that tobacco products will continue to be subject to current GST rates plus a compensation cess until pandemic-related loans to states are repaid. Once repaid, the government plans to remove the compensation cess and tax tobacco products at a uniform 40% GST rate.
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The Indian government is exploring options to impose an additional levy on tobacco products, including cigarettes, cigars, chewing tobacco, and gutka. This move comes as part of a broader strategy to maintain the current tax burden on these products while potentially simplifying the tax structure in the future.
Two Options Under Consideration
According to sources, the government is examining two primary options for implementing this additional levy:
Adjusting Central Excise Duty: This approach would involve modifying the central excise duty in a manner similar to pre-GST (Goods and Services Tax) structures.
Introducing a New Health Levy: This option would require an amendment to the GST Act through parliamentary approval.
Current Tax Rates and Implementation Timeline
The combined tax rates on tobacco products currently vary widely:
- Some items are taxed at 60-80%
- Products like gutka face tax rates of 160-200%
The government is expected to implement the additional levy in the fourth quarter of the current fiscal year. This new levy will apply exclusively to tobacco products and will not affect other goods under the new 40% GST rate, such as luxury cars and carbonated beverages.
GST Rates and Compensation Cess
Finance Minister Nirmala Sitharaman has confirmed that tobacco products will continue to be subject to current GST rates plus a compensation cess. This arrangement will remain in place until the government fully repays pandemic-related loans to states.
The Centre's borrowing for state GST compensation includes:
| Fiscal Year | Amount (in Rs) |
|---|---|
| 2020-21 | 1.1 lakh crore |
| 2021-22 | 1.59 lakh crore |
For the current fiscal year:
- Target collection through compensation cess: Rs 1.67 lakh crore
- Allocation for loan repayments: Rs 67,500 crore
Future Tax Structure
Once the loans are repaid, the government plans to remove the compensation cess. At that point, tobacco products will be taxed at a uniform 40% GST rate, aligning with other goods in the highest tax bracket.
Industry Impact
While the government's move aims to maintain the overall tax burden on tobacco products, the industry will be watching closely to see how these changes might affect pricing and consumption patterns. The introduction of an additional levy, whether through excise duty adjustments or a new health levy, could potentially impact the cost structure for tobacco companies.
As the government finalizes its approach, stakeholders in the tobacco industry will need to prepare for potential shifts in the tax landscape while maintaining compliance with evolving regulations.
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