Cigarettes & Tobacco Products under GST

Introduction

Ever since the beginning of taxation, governments have tried to levy ever increasing taxes on cigarettes and tobacco products, out of the need to curb their usage. Considering the previous regimes, excise duties on cigarettes was increased by 22% in 2012-13, 18% in 2013-14 and around 21% in 2014-15. The current government has been even more aggressive than its predecessors, hiking duties on cigarettes in the range of 11% to 72% while presenting a truncated budget in July 2014, followed by an additional 10% during the final Union Budget of 2015-16. Even, in the Union Budget of 2017-18, presented a few months back prior to the GST rollout, excise rates of several tobacco products was hiked, most possibly to prepare the industry for the GST rates to be applied in the time to come.
Similar to all other goods and services, Central Excise and VAT charged on cigarettes and other tobacco products
In short, over the last 4 years, the incidence of Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by almost 118% and 145% respectively, thereby exerting severe pressure on the tobacco industry. If one delves a little deeper, one may observe that the steep increase in Excise Duty on cigarettes over the years, has resulted in increasing the difference in tax rates between cigarettes and other tobacco products, from about 29 times in 2005-06 to about 53 times currently.

What this high incidence of discriminatory taxation on cigarettes in India has done is, encouraged the consumption of lightly-taxed or tax-exempt tobacco products like bidi, khaini, chewing tobacco, gutkha and illegal cigarettes which, as on today, constitute over 89% of the total tobacco consumption in the country.

It is under such circumstances that we as a nation, welcomed the GST era on 1^st July, 2017. Let us see how GST is set to affect the wallet of those who step out for a smoke regularly.

Read: Budget 2023 – Impact of GST on Cigarettes & Tobacco Products

Cigarettes & tobacco products in the previous regime

Excise

Cigarettes and Tobacco products, in the previous regime, primarily attracted Excise Duty and VAT. However, even before VAT was applicable, a slew of excise duties and cesses were applicable, majority of which were: Excise Duty, Additional Duties of Excise & NCCD.

The rates of various tobacco products were as follows:

Tobacco Products	Excise	ADE	NCCD
Non-filter Cigarettes ( < 65 mm)	INR 1280 / thousand units	INR 37 / thousand units	INR 90 / thousand units
Non-filter Cigarettes ( > 65 mm, < 70 mm)	INR 2355 / thousand units	INR 125 / thousand units	INR 145 / thousand units
Filter Cigarettes ( < 65 mm)	INR 1280 / thousand units	INR 185 / thousand units	INR 90 / thousand units
Filter Cigarettes ( > 65 mm, < 70 mm)	INR 1740 / thousand units	INR 300 / thousand units	INR 90 / thousand units
Filter Cigarettes ( > 70 mm, < 75 mm)	INR 2355 / thousand units	INR 400 / thousand units	INR 145 / thousand units
Other Cigarettes	INR 3375 / thousand units	INR 495 / thousand units	INR 235 / thousand units
Unmanufactured Tobacco	64%	10%	10%
Tobacco Refuse (Branded)	55%	10%	NA
Chewing Tobacco	81%	18%	10%
Jarda	81%	18%	10%
Gutkha	60%	18%	10%
Cigars, Cheroots & Cigarillos	12.5% or INR 3755 / thousand units (higher of)	NA	NA
Cigarette Substitutes	12.5% or INR 3755 / thousand units (higher of)	0%	INR 150 / thousand units
Other Tobacco Products	81%	18%	10%

VAT

As for other goods, cigarettes and tobacco products attract VAT, as per the rates which have been decided in each state. While the rates are variant indeed, a common factor is, that each state has attempted to levy higher VAT rates than usual for products belonging to this category, in a bid to discourage their usage. Rajasthan had one of the highest VAT rates for tobacco products at 65%, followed by J&K at 40%, against a national average of 27%.

However, it goes without saying that the effective tax, although high enough has done little to deter cigarette smoking as a habit across the country.

GST impact on cigarettes and tobacco products

The First look

Similar to all other goods and services, Central Excise and VAT charged on cigarettes and other tobacco products, have been subsumed under GST. The GST Council after much deliberation, has finalised the highest tax slab rate of 28%, in addition to which GST Compensation Cess and National Calamity Contingency Duty (NCCD) will be levied.

The GST Compensation Cess, as the name suggests, is being levied to create a corpus for compensating states for any loss of revenue from implementing the GST, which subsumed over a dozen central and state levies.

Initially the following were the GST Compensation Cess Rates determined for cigarettes and other tobacco products:

Tobacco Product	GST Compensation Cess Rate
Non-filter Cigarettes ( < 65 mm)	5% + INR 1591 / thousand units
Non-filter Cigarettes ( > 65 mm, < 70 mm)	5% + INR 2876 / thousand units
Filter Cigarettes ( < 65 mm)	5% + INR 1591 / thousand units
Filter Cigarettes ( > 65 mm, < 70 mm)	5% + INR 2126 / thousand units
Filter Cigarettes ( > 70 mm, < 75 mm)	5% + INR 2876 / thousand units
Other Cigarettes	5% + INR 4170 / thousand units
Unmanufactured Tobacco	65% – 71%
Tobacco Refuse (Branded)	61%
Chewing Tobacco	142% – 160%
Jarda	160%
Gutkha	204%
Cigars, Cheroots & Cigarillos	21% or INR 4170 / thousand units (higher of)
Cigarette Substitutes	12.5% or INR 4006 / thousand units (higher of)
Other Tobacco Products	11% – 290%

Given these GST Compensation Cess rates, it was speculated that the GST impact on the cigarette and tobacco industry, at least the organised part of it, is largely going to be neutral as the standard 5% ad valorem rate of cess was mostly at par with the existing tax rates. While an initial increase in the price in the transition period was inevitable, it was expected to settle down over a period of time, given the benefits to manufacturers over a period of time.

The dilemma

However, a few days into the GST era, the GST Council, post recalculations, arrived at the conclusion that the GST rate being levied on cigarettes along with the cess was turning out to be lower than the combined incidence of central excise, state VAT, and other levies put together. The reason for the same was that the earlier calculations did not take into consideration the cascading effect of taxes which were levied on cigarettes in the previous regime. The total revenue gain, emerging from this cap was estimated to be around INR 5000 crore per annum, which was a substantial amount.

The main concern, which naturally emerged was this: either this revenue would serve to bring down the prices of cigarettes (which is not desirable), or, this would pass on as balance profit to the cigarette manufacturers, which, of course, was not the intention of the GST Council.

Thus, in cognizance of this gap, the GST Council convened an early meeting on the 17^th of July, and a unanimous decision to increase the cess amount appropriately was taken in consultation of all states.

The revised cess

As per the deliberations of the GST Council, the following were the revised GST Cess rates agreed upon:

Cigarette Type	Initial GST Cess Rates	Revised GST Cess Rates
Non-filter Cigarettes (< 65 mm)	5% + INR 1591 / thousand units	5% + INR 2076 / thousand units
Non-filter Cigarettes (> 65 mm, < 70 mm)	5% + INR 2876 / thousand units	5% + INR 3668 / thousand units
Filter Cigarettes (< 65 mm)	5% + INR 1591 / thousand units	5% + INR 2076 / thousand units
Filter Cigarettes (> 65 mm, < 70 mm)	5% + INR 2126 / thousand units	5% + INR 2747 / thousand units
Filter Cigarettes (> 70 mm, < 75 mm)	5% + INR 2876 / thousand units	5% + INR 3668 / thousand units
Other Cigarettes	5% + INR 4170 / thousand units	36% + INR 4170 / thousand units

However, even though the GST cess rates were increased, the GST Council has clarified that consumer prices will not be affected by this change, as the increased tax incidence only seeks to neutralise the windfall profits, which the manufacturer would have otherwise earned.

Conclusion

Considering the revised cess rates, the taxes applicable on cigarettes in the GST regime translated roughly to an average increase of 13% over the rates which existed immediately prior to the GST rollout. With this, the cumulative growth of tax rates on cigarettes, reaches a staggering 202% over the last 6 years, that is, since 2011-12.

While the increase in tax on demerit goods, is always welcome news, it bodes ill for cigarettes and tobacco products after GST, and the industry at large. In the wake of increasing taxes in the GST era as well, there is a rising concern over the consequential growth of illicit, duty evaded cigarettes and smuggling of tobacco products into the country. In the long run, this could adversely affect the revenue collection as well, unless monitored carefully. Thus, the government, will need to maintain a fine balance by maintaining the right tax rates for this segment, which discourages usage, as well as prevents any detrimental business practices.