To correct duty anomaly, GST Council hikes cess on cigarettes

Swinging into action on its own, the Goods and Services Tax (GST) Council on Monday increased the cess on cigarettes to correct a duty anomaly that was yielding windfall profits to tobacco companies. The government, however, expects no change in prices despite the higher cess.

While retaining the ad valorem compensation cess of 5 per cent on most filter (up to 75 mm) and non-filter cigarettes (up to 70 mm), the GST Council hiked the numerical cess by ₹485-792 per 1,000 sticks. For other cigarettes, the ad valorem cess was hiked by 31 per cent. (See table)

Cigarettes continue to be taxed at the highest GST rate of 28 per cent.

“In the first 15 days of GST it was noted that the rate fixed for cigarettes, when translated as a cost of the cigarette, indicated the cascading effect had not been factored in. It was leading to windfall profits for cigarette companies,” said Finance Minister Arun Jaitley, who chairs the Council.

Since tobacco companies cannot lower the rate of cigarettes, this profit would have been transferred to their balance sheets, Jaitley said, adding that this was not the intent of the Council.

The decision, which will be effective from midnight of Monday, will raise an additional ₹5,000 crore of revenue to the government.

Vanaja N Sarna, Chairperson, Central Board of Excise and Customs, ruled out any hike in retail prices of cigarettes. “This was just a corrective measure,” she said. This was the 19th meeting of the GST Council but the first since the rollout of the new levy. The Council had last met on June 30 and had originally scheduled its next meeting for August 5.

Jaitley said the meeting was specially called to correct this particular duty anomaly.

Expressing satisfaction over the rollout of GST from July 1, he said that high registrations have begun to indicate an increase in the tax payer base.

While 70 lakh existing taxpayers have already migrated to GST, another 5 lakh new application have been registered and 2.5 lakh applications are pending for registration.

“We are almost at the verge of crossing the original estimate of 80 lakh taxpayers under GST,” Jaitley said.

He also ruled out any immediate review of the duty on textiles and yarns.