GST Rate on Tobacco Products and Cigarettes

Bio

Sandipan Mitra is the CEO and co-founder of Pice. He boasts eight years of experience in the B2B and fintech sector. Sandipan's journey includes significant roles at multiple Indian Unicorns Including Product at PayU, and as founding member / VP, Product at Open Financial Technologies.

17 Sep 24
9 mins

Sandipan Mitra

08 Mins
17-09-24

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Table of Contents

GST Rate for Tobacco
GST Cess for Tobacco Products
HSN Code for Tobacco
How to Calculate GST on Tobacco?
Which Tobacco Products Remain Unaffected by the New Policy?
Impact of Capping the GST Compensation Rate for Certain Tobacco Products

Tobacco products are taxed at a high GST rate of 28% plus an additional compensation cess.
GST aims to reduce the affordability of tobacco products by significantly increasing their prices.
Different tobacco products, including cigarettes and smokeless tobacco, have specific GST and cess rates.
GST implementation has impacted the tobacco industry's revenue and consumer pricing strategies.
The government uses high taxation on tobacco to curb consumption and address public health concerns.

The implementation of GST in India has significantly affected the tobacco industry, altering the tax landscape for various tobacco products, including cigarettes, pan, gutkha, and other forms of smokeless tobacco.

GST Rate for Tobacco

Tobacco products are subject to one of the highest GST rates in India, reflecting the government's efforts to curb tobacco consumption due to its health impacts. The standard GST rate for tobacco products is set at 28%, with additional levies such as the GST cess rate. This high tax rate aims to reduce the affordability of tobacco products, thus controlling their demand, especially in a country recognized as one of the largest consumers of tobacco worldwide.

However, the implementation of GST has also brought economic costs, impacting the tobacco supply chain and the revenue from tobacco products. Tobacco taxation is complex, involving multiple components such as value-added tax revenue, excise duty, and compensation cess. These taxes have a direct effect on the retail price and real prices of tobacco products, influencing their average consumption and demand elasticity.

GST Cess for Tobacco Products

In addition to the high GST rate, a compensation cess is imposed on tobacco products to offset the revenue shortfalls caused by the transition to the GST regime. This cess is part of the government's strategy to address the national calamity contingent duty that arises due to tobacco-related diseases and public health concerns.

GST Rate and Cess for Pan, Gutkha, Chewing Tobacco, and Tobacco Products

Pan, gutkha, and other smokeless tobacco products are subject to a statutory GST rate of 28%, plus a significant GST cess. The additional cess further increases the overall tax burden on these products, reflecting the government's public policy to discourage their use. Smokeless tobacco taxation aims to address the affordability of tobacco products and reduce the health risks associated with their consumption. For instance, the demand for tobacco products like pan and gutkha has shown sensitivity to tax increases, as reflected in studies on price elasticity and the manual on tobacco tax.

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GST Rate and Cess for Cigarettes

Cigarettes are taxed at the highest rate under the GST regime, with a GST rate of 28% coupled with a high cess based on the length of the cigarette. Filter cigarettes and cigarettes of tobacco substitutes fall into this category, with the cess calculated per unit length. The tax burden on cigarettes also includes excise duty and other forms of indirect taxation. The cumulative effect of these taxes impacts the price of cigarettes and can potentially alter trends in affordability and consumption patterns. This high taxation is part of efforts to control the tobacco epidemic and limit the harm from tobacco.

GST Rate and Cess for Other Tobacco Products

Other tobacco products such as cigarillos of tobacco substitutes, tobacco extracts, and hookah tobacco are also taxed at 28% GST along with a compensation cess. The GST on tobacco products aims to reduce tobacco consumption by making these products more expensive. The National Calamity Contingent Duty further raises the tax burden on these products, aligning with the government's goal to address the potential impact of tobacco use on public health and revenue.

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HSN Code for Tobacco

The Harmonized System of Nomenclature (HSN) code is used for classifying tobacco products for taxation purposes. Each type of tobacco product, including cigarettes, chewing tobacco, and smokeless tobacco products, has a specific HSN code that determines its tax rate under GST. The proper classification is crucial for calculating the correct GST cess rate and ensuring compliance with the tobacco tax policy.

How to Calculate GST on Tobacco?

Calculating GST on tobacco involves applying the statutory GST rate of 28% to the product's base price, followed by the additional GST cess. For example, the GST on cigarettes includes the base price, the 28% GST rate, and a cess calculated based on the length of the cigarette. Tobacco manufacturing units must also consider other taxes such as excise duty and indirect taxation, which contribute to the overall tax liability. Businesses in the tobacco industry must stay informed about tax rates and use proper methods data to calculate their GST liabilities accurately.

Which Tobacco Products Remain Unaffected by the New Policy?

Despite the extensive GST implementation, some tobacco products may remain relatively untouched by the new policy due to the specific nature of their market or production. For instance, products in the informal tobacco sector, such as certain forms of traditional or unprocessed tobacco, may not be as heavily taxed as mainstream tobacco products. This distinction creates an aggregate state-wise impact, as informal products might evade the full tax burden, affecting the overall revenue from tobacco taxation.

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Impact of Capping the GST Compensation Rate for Certain Tobacco Products

The capping of the GST compensation rate for certain tobacco products has implications for both the tobacco industry and the government. While the cap aims to balance revenue generation with public health objectives, it also has a national level impact by influencing the prices of tobacco products. The cap can affect the affordability of tobacco products, potentially leading to changes in consumer behavior and tobacco consumption. For instance, a cap on the GST cess rate could lead to a quick price adjustment in the retail market, affecting the average consumption patterns and the demand elasticity for tobacco products.

The government also considers the broader economic context, including the crores of revenue generated from the tobacco industry. Tobacco users, particularly in middle-income countries, are sensitive to price changes, as indicated by the own-price elasticity of demand. Hence, policymakers must weigh the potential health benefits of reduced tobacco use against the revenue shortfalls that might arise from capping the GST rate and cess.

In conclusion, the impact of GST on tobacco products is multifaceted, encompassing public policy, economic costs, and public health considerations. While high GST rates and compensation cess aim to reduce tobacco consumption and its associated harms, they also present challenges for the tobacco industry in terms of compliance, revenue, and pricing strategies. Understanding these dynamics is crucial for stakeholders, including tobacco manufacturers, policymakers, and public health advocates, to navigate the complex landscape of tobacco taxation under the GST regime.

FAQs

What is the tax treatment of tobacco products?

Tobacco products in India are subject to a high tax burden under the GST regime, including a 28% GST rate plus an additional compensation cess. This high rate is intended to discourage consumption due to the health risks associated with tobacco use. Besides GST, tobacco products are also subject to excise duty and other levies like the National Calamity Contingent Duty. The tax treatment varies based on the type of tobacco product, such as cigarettes, chewing tobacco, and smokeless tobacco, with each category having specific tax rates and cess amounts.

What is excise duty on chewing tobacco after GST?

After the implementation of GST, chewing tobacco is taxed at a GST rate of 28% along with an additional GST compensation cess. The excise duty on chewing tobacco has been replaced by the GST and the compensation cess, which aims to simplify the tax structure and ensure uniformity in taxation. However, specific categories of chewing tobacco might still attract additional duties or cess based on the government's policies to curb tobacco consumption. The overall tax treatment of chewing tobacco is designed to make it less affordable and reduce its use.

What is the IGST on tobacco?

The Integrated Goods and Services Tax (IGST) on tobacco is applicable when tobacco products are supplied inter-state. The standard IGST rate for tobacco products is 28%, consistent with the GST rate applied under the Central and State GST. Additionally, tobacco products subject to IGST may also incur a compensation cess, depending on the product type. This high tax rate, combined with the cess, significantly increases the overall cost of tobacco products in interstate transactions.

What is the rate of GST on luxury items and tobacco?

Both luxury items and tobacco products attract the highest GST rate of 28%, reflecting their categorization as non-essential goods. In the case of tobacco products, this rate is accompanied by an additional compensation cess, further increasing the tax burden. The high GST rate on these items serves a dual purpose: to generate substantial revenue and to deter consumption, especially for products like tobacco that pose significant health risks. The tax structure aims to make such items less accessible and affordable to the general population.

What is the effect of GST on tobacco products?

The introduction of GST has had a profound impact on tobacco products, significantly raising their prices due to the 28% GST rate and the additional compensation cess. This tax structure aims to reduce the affordability and consumption of tobacco products, thereby addressing public health concerns. However, the higher tax burden has also affected the revenue generated from tobacco products, with the industry experiencing changes in production costs and retail pricing. Overall, GST has made tobacco products more expensive, aligning with public policy goals to curb tobacco use.

Is tobacco GST free?

No, tobacco is not GST free. Tobacco products are subject to the highest GST rate of 28%, along with an additional compensation cess, depending on the type of product. This high taxation level is part of the government's effort to control tobacco consumption due to its harmful health effects. In addition to GST, tobacco products may also be subject to other taxes, such as excise duty, making them significantly more expensive.

How do you calculate GST on tobacco?

To calculate GST on tobacco, you first determine the product's base price and then apply the standard GST rate of 28%. After calculating the GST amount, you need to add the applicable compensation cess, which varies depending on the type of tobacco product (e.g., cigarettes, chewing tobacco, etc.). The total tax amount, including both GST and cess, is added to the base price to determine the final retail price of the tobacco product. This comprehensive tax calculation ensures that the overall cost of tobacco products reflects the government's policy to curb their consumption.