India to Puff Up GST on Cigarettes and Tobacco Products once Compensation Cess is Removed

Maybe it's time to kick the habit, or maybe the government might strong-arm you into doing it. Latest reports suggest that the Union Government looks to increase the Goods and Services (GST) on cigarettes and similar tobacco products. The increase is slated to come into effect once the existing compensation cess on tobacco products comes to an end on 31 March, 2026.

The GST compensation cess is an extra charge applied to specific goods and services to offset revenue losses experienced by states following the introduction of the Goods and Services Tax (GST) in 2017. This levy is imposed on top of the standard GST rate applicable to those goods and services.

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Cigarettes and other tobacco products currently attract a GST of 28%, coupled with other levies such as excise duty and the National Calamity Contingent Duty, they burn through smokers’ pockets with a total tax burden of 53%.

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One of the options being explored is to amp up the applicable GST to the highest permissible slab of 40% while still attracting an excise duty on top of the same. A secondary option considers the introduction of a “health cess” but was not met with much interest from most governments.

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Cigarettes are one among the long list of “sin goods” - products deemed to be harmful or dangerous in nature, and hence their consumption is tagged along with a form of “sin tax” as a legislative deterrent to discourage people from consuming it. Tobacco products currently attract GST, excise duty and the National Calamity Contingent Duty

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However, the rulebook on ‘sin tax’ has blurred lines with some Governments such as those of Kerala and Tamil Nadu exercising complete monopoly over the retail sale of alcohol.

Tobacco is one of the most widely consumed intoxicants consumed in India, thus being a constant source of tax revenue even raking in ₹72,788 as taxes during 2022-23. At present, a 5% compensation cess is imposed on items such as cigars and cigarettes, accompanied by an extra fixed charge ranging from ₹2,076 to ₹4,170 per 1,000 units. The exact levy varies based on factors like size and added flavors.

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The GST Council had previously constituted a Group of Ministers headed by Odisha Finance Minister Niranjan Pujari to study taxation on tobacco products. The Ministers recommended that the maximum retail price of the product be increased rather than the sales value.

The proposed change is in line with the modus adopted by many foreign countries such as Spain, UAE and Ireland where the increased price of cigarettes have prompted smokers to explore alternatives such as rolling tobacco, nicotine patches, pouches and gums.

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