The government has clarified that no additional Goods and Services Tax (GST) will be imposed on tobacco products, but the overall tax incidence will remain the same through the introduction of an additional central levy.
This move comes as the GST Compensation Cess regime nears its end, prompting the Centre to identify new ways to maintain its revenue from sin goods such as tobacco and pan masala.
No Change in GST Rate, But Tax Structure to Adjust
A senior government official told Moneycontrol that there are no plans to increase GST rates on tobacco-related items. However, the Centre intends to preserve the effective tax incidence by adding a separate central levy outside the GST framework.
“There will be no additional GST on tobacco and related items. The tax incidence will be kept the same using an additional central tax levy,” the official said.
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Current Tax Structure on Tobacco and Pan Masala
At present, tobacco products attract the highest GST slab of 28%, along with a compensation cess that varies across categories.
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The total tax incidence on tobacco products currently stands at around 53%.
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For pan masala, the combined tax burden is about 88%, which includes 28% GST and a compensation cess.
This high taxation model was designed to both discourage consumption and generate substantial revenue for the government.
Compensation Cess Regime Nearing Sunset
The GST Compensation Cess—originally introduced to help states offset revenue losses from the transition to GST—is approaching its sunset period.
However, the cess will continue until all pending loans taken to cover past compensation gaps are fully repaid. Once that is achieved, the government plans to replace the cess component with a new central levy to ensure steady revenue from high-tax items like tobacco.
“There is no proposal to increase the GST rate on tobacco. The Centre will ensure that the effective tax incidence remains unchanged,” the official reiterated.
Why the Move Matters?
This decision highlights the government’s intent to maintain fiscal stability while avoiding further tax hikes on essential revenue-generating goods. By creating a parallel central levy, the Centre ensures that the burden on consumers remains constant, while the revenue stream for the exchequer stays intact.
The move also signals a broader fiscal transition as India prepares to phase out the compensation cess system without losing out on collections from high-yield sin goods.
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