The Goods and Services Tax Network (GSTN) has issued a detailed advisory addressing critical compliance challenges for tobacco manufacturers and distributors ahead of the new Retail Sale Price (RSP)-based valuation regime implementation from February 1, 2026. The guidance follows recent notifications that fundamentally alter how GST is calculated on tobacco products, shifting from transaction-based to RSP-based valuation.

New RSP-Based Valuation Framework

The notified framework, established through Notifications 19/2025–Central Tax and 20/2025–Central Tax dated December 31, 2025, represents a significant departure from traditional GST valuation methods. Under this system, tax liability is determined using the Retail Sale Price declared on product packaging, regardless of actual transaction values, discounts, or promotional pricing.

For covered products, RSP is treated as a tax-inclusive price, requiring GST computation through statutory reverse-calculation formulas. The deemed taxable value is derived from RSP after extracting applicable tax components, rather than being directly reported as the sale price.

System Compatibility Challenges

The implementation faced significant technical hurdles due to fundamental differences between the new valuation method and existing GST compliance systems. Current e-invoicing portals, e-way bill systems, and return filing platforms were designed around transaction-value models, creating validation conflicts.

The primary issue emerged from system validations requiring the sum of taxable value and tax to not exceed total invoice value. In RSP-based scenarios, deemed taxable values derived from RSP often exceed actual commercial consideration, particularly when trade discounts are involved. This mismatch threatened to cause invoice rejections, system errors, and filing disruptions despite correct tax computation.

GSTN's Practical Solution

To address these technical challenges without altering statutory requirements, GSTN has prescribed a comprehensive reporting workaround specifically for notified tobacco goods. The advisory provides clear guidance for system compatibility while maintaining legal compliance.

The advisory clarifies that while taxable value fields may reflect commercial consideration for system purposes, tax liability remains anchored to RSP calculations. Taxpayers are permitted to manually edit system-calculated tax figures in returns to align with RSP-based computation requirements.

Industry Impact and Expert Perspectives

The shift to RSP-based valuation represents a structural transformation for the tobacco sector, effectively delinking GST liability from transaction values. This change addresses discount-driven tax arbitrage and value suppression practices, resulting in higher and more predictable tax obligations.

Rajat Mohan, Senior Partner at AMRG & Associates, characterized the advisory as "practical and timely clarification," noting that it benefits manufacturers, importers, and distributors while supporting tax authorities through cleaner data and reduced disputes. The guidance reflects regulatory intent to tighten valuation controls in sensitive sectors without creating unintended compliance barriers.

Stakeholder Requirements

The advisory impacts multiple industry participants who must ensure proper implementation of the new framework. Key stakeholders include tobacco manufacturers, FMCG companies with tobacco portfolios, importers, wholesalers, distributors, ERP solution providers, and tax professionals.

GSTN has emphasized the importance of correct goods classification and strict application of RSP-based valuation where notified, warning that incorrect implementation could result in demands, interest, and penalties. The guidance serves as a crucial bridge between policy intent and practical compliance execution as India's GST framework continues evolving toward enhanced valuation controls in select sectors.