Centre weighs extra duty on tobacco, states seek a share

Economic Times

2 days ago

Synopsis
To maintain overall taxation on tobacco products post GST 2.0 reforms, the Centre may impose additional excise or special duty above the proposed 40% GST. Some states are advocating for a significant share in this additional taxation to offset potential revenue losses.
iStock The Centre may levy additional excise duty or special duty above the proposed 40% goods and services tax (GST) on tobacco products to maintain the overall taxation, in absence of compensation cess in the GST 2.0 reforms announced by Prime Minister Narendra Modi.However, some states are seeking a "significant share" in the additional taxation on tobacco products to compensate for the immediate revenue loss, people privy to the discussions told ET, citing the ongoing discussions with the states on taxation on sin goods in general and tobacco in particular.
"During the discussion some states asked for equal share on the additional duty to be imposed," one of the persons said on condition of anonymity, without naming any state.
The group of ministers on rate rationalisation, headed by Bihar's deputy chief minister Samrat Chaudhary, may meet one more time ahead of the next GST Council meeting to discuss the issue, the person said, adding that all states are looking forward to the next generation GST reforms. The final call on the matter will be taken at the GST Council meeting.
Currently tobacco and tobacco products, including cigarette, cigars, pan masala, cigarillos and hookah, attract the highest GST rate of 28% plus compensation cess, central excise duty and national calamity contingent duty, taking total indirect tax levied to 53%.
Average annual GST collection from tobacco products in the past five years amounted to ₹51,000 crore, along with additional education cess and surcharges from tobacco manufacturers totalling ₹27,659.84 crore.On Independence Day, the finance ministry proposed a two-tier GST structure, doing away with 12% and 28% tax slabs, and suggested a 40% slab for five to seven sin goods including tobacco and tobacco products. However, it said that overall taxation on tobacco products would not go down. With compensation cess gone, this can be done only by levying some other additional duty.
Smoky Affair A few states are seeking either an equal share in the additional duty or the right to levy tax accordingly, as in the case of alcohol in the form of a separate state excise duty. Their argument is that there is enough headroom to go beyond 53% of existing indirect tax on tobacco products, without any revenue loss to either the Centre or states."A few states suggested that either it should be a basic excise duty, divisible between the Centre and states, or a central excise duty along with state excise duty - which would be a win-win for both, giving headroom to states to generate their revenue," said a person aware of the deliberations.States like Kerala have already sought compensation for revenue loss on account of GST reforms."The so-called simplification of GST rates announced by Modi will be devastating for state revenues," Kerala finance minister Thomas Issac said in a post on X. "The GST rates that have already been rendered below revenue neutral rate by 2018 pre-election simplification, will now shrink further. States must be compensated for the loss."Tobacco products in India remain among the most affordable globally, as flagged by the parliamentary standing committee in its 139th report. The report said there is significant headroom to enhance taxation on these products, suggesting a peak rate of 40% and substantial increase in excise duty.