The Goods and Services Tax (GST) Council on Monday decided to increase the cess on cigarettes to offset a reduced tax revenue from the product following the 1 July rollout of the indirect tax reform.
Accordingly, the tax burden on cigarettes will go up by Rs4.8-7.9 per 10 sticks, depending on their length and whether or not they have filters. Finance minister Arun Jaitley, who briefed reporters after the GST Council meeting held via videoconferencing, said the increase in cigarette cess will benefit the exchequer by about Rs5,000 crore a year.
“Each state specifically responded positively (to the proposal) and this change will be effected from midnight (of Tuesday),” said Jaitley.
The GST Council decided to meet on Monday, advancing its meeting scheduled for the first week of August, to address the issue. A statement issued after the GST Council meeting said the method of calibrating the GST compensation cess on cigarettes did not take into consideration the cascading of taxes that existed in the earlier regime, which has now disappeared, thus leading to a reduction in the tax burden on the item.
In the earlier indirect tax regime, state level value-added tax used to be levied on the commodity which included the excise duty, resulting in a tax on tax. In the GST regime, such anomalies have been removed.
“While any reduction in tax incidence on items of mass consumption would be welcome, the same would be unacceptable in case of demerit goods like cigarettes,” said the statement, explaining the rationale behind the move.
Pratik Jain, partner and leader of the indirect tax practice at PwC India, said that more than the tactical move to increase the cess, the GST Council meeting had shown its inclination and flexibility to take quick decisions.
“One would hope that a few other issues such as GST rates on existing car leases, ambit of registered trade mark for taxation of packed food products etc, are addressed in the next meeting,” said Jain.
The GST Council meeting on Monday was the first after the roll-out of the indirect tax reform a fortnight ago.
“So far, the functioning has been smooth. The central and state governments are addressing the queries being raised,” said Jaitley.
Prashant Deshpande, partner, Deloitte Haskins & Sells LLP, said implementation has so far been far smoother than anticipated, but the robustness of the information technology infrastructure supporting GST would be put to test at the time of filing of returns.
Vishal Raheja, senior consultant, Taxmann, a tax services provider, said the increase in cess will push up prices of cigarettes considerably. “The increased cess is in addition to the highest rate of GST i.e. 28% and ad valorem cess of 5%,” he noted.