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Impact of GST on the Tobacco Industry

There are certain things in life that we just can’t help but do, even though, our better judgment advises us not to, like falling in love with your best friend’s boy/girlfriend.  You know, logically, the object of your affection is unattainable, but you crave it anyway.  Similarly, every smoker knows the harmful side effects of smoking cigarettes or consuming tobacco products, but as the addiction has already happened and regardless of the measures the government takes to dissuade smoking cigarettes or the consumption of tobacco, the intake of it will be inevitable.

Tax Rates Post GST

The taxes collected from the tobacco industry is an excellent source of revenue for the government.  With the tobacco industry falling into the “sin” goods category, which is taxed at 28% with compensation cess and NCCD levied on top, the government can anticipate an increase in revenue collected from this sector.  The new cess rates for tobacco and tobacco products are:

  • Cigarettes containing tobacco, except for filter cigarettes less than 65mm in length, would now have a cess impact of 5% + Rs. 2,076 per thousand.
  • Cigars (over 70mm in length) would now have a cess impact of 21% or Rs. 4,170 per thousand, whichever is higher.
  • Pan masala will have a GST compensation cess of 60%, while gutkha will carry a 72% additional cess.
  • Additionally, locally manufactured bidis, which were exempt from excise, since it employs villagers during the offseason in agriculture when work is less, will also face taxation

Contrastingly, the new GST rates, are lesser than the combined taxes (VAT, excise, etc.) pre-GST regime.

Implications of Increased Taxation

Even if big industry players such as India Tobacco Company (ITC), which sells 3 out of 4 cigarettes sold, legally, across the country, decides to raise prices slowly over time because of the new tax rates, consumption will most likely not suffer. The real players affected by the raised taxes are the small tobacco farmers, as 5% GST has been imposed on tobacco leaves and 28% on unmanufactured tobacco(unbranded).

Due to the moral and health implications of the nature of the products of the tobacco industry, it faces high taxation.  These products, however, will not disappear with over taxation.  Instead, like the prohibition of the 1920’s, it will move underground, and the illegal cigarette market will increase, according to experts. In India 1/5 of all tobacco products sold is in the illegal market and we are already the fourth largest country in the world with the movement of illegal cigarettes.  Industry leaders, such as ITC and VST worry that with continuous over taxation, the illegal cigarette and tobacco market will increase further.  However, the World Health Organization (WHO), feels the tax rates on the tobacco industry in India, are not high enough.  Activists and health professionals are also not happy with the newly announced tax rates.

Since the latest GST council meeting, there have been no decreases or increases in the tax rates, as tobacco products are part of the 28% “sin” goods category.  Despite the high taxations, the impact felt will be very little on the industry as profit margins will likely not suffer since it is predicted that consumption will most likely also not suffer and the government will stand to gain in increased revenue from this sector.

Reach out to the experts at H&R Block to get help in the filing of your GST returns.

Ankita Mathur
Ankita Mathur
Ankita is a CA by qualification and a tax advisor at H&R Block. She works as a senior advisor in the GST Centre of Excellence at H&R Block. She also specializes in matters of India & US individual taxes. Her job involves helping people understand their taxes in the most simplified ways and giving them sound advise on saving taxes.

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