No Extra GST on Tobacco; Centre Plans New Levy as Cess Period Nears End

No Extra GST on Tobacco; Centre Plans New Levy as Cess Period Nears End

Issue: With the expiry of the existing GST Compensation Cess, the Central Government needed a mechanism to maintain the high tax burden on demerit/sin goods like tobacco, thereby ensuring continuity of high revenue generation and public health deterrence, without destabilizing the core GST rate structure.

Facts:

• Tobacco and related products are currently subject to the highest 28% GST rate plus the GST Compensation Cess.
• The GST Compensation Cess is set to expire, which would otherwise result in a massive tax cut for these products and a significant revenue loss for the government.
• The government intends to maintain the high ‘sin tax’ burden on these products for public health and fiscal reasons.
• The Centre specifically decided not to raise the base GST rate above the existing 28% slab for these items.

Decision:

The Central Government plans to maintain the tax burden on tobacco and related products by introducing a new, separate Central levy (a non-GST levy) to replace the revenue previously generated by the Compensation Cess.

Key TakeDowns:

• Tax Burden Maintained: Consumers of tobacco products will continue to face the high, deterrent tax rates, as the new levy will effectively substitute the expiring Compensation Cess amount.
• Preserving GST Integrity: This move prevents the distortion of the core GST rate structure (keeping the base rate at 28%) by creating a special-purpose levy outside of the Goods and Services Tax mechanism, thereby preserving the framework’s stability.
• Fiscal Security: The new levy ensures a guaranteed and continuous source of high revenue for the Central Government from demerit goods, addressing the revenue gap created by the Cess expiry.