Cigarettes, Carbonated Drinks, Luxury Cars And More Likely To Attract Heftier GST | Profit Exclusive

The Goods and Services Tax (GST) on sin goods such as cigarettes, tobacco products, carbonated drinks, and high-end automobiles, could rise once the existing compensation cess expires later this fiscal year.

A high level state panel who is reviewing the future of compensation cess is weighing proposals to either introduce a new green and health cess on these products or subsume the existing cess into the GST rate. Either move could effectively raise the total tax incidence on these items.

These select items are currently taxed at the highest GST slab of 28%, along with an additional compensation cess ranging from 11% to 290%, depending on the item. With the cess nearing expiry, policymakers are examining ways to absorb it into the GST itself to offset the potential revenue impact from these high-yielding items.

The compensation cess, introduced in 2017 to offset state revenue shortfalls following the rollout of GST, was initially intended for five years but was extended in 2022 until March 2026. The extension aimed to repay a Rs2.69 lakh crore loan taken by the Centre during the pandemic to bridge revenue gaps. Initial estimates suggest the debt will be fully repaid by January 2026, leaving a projected surplus of Rs 40,000 crore from collections in the remaining two months. The panel will need to decide how this surplus will be distributed, alongside finalising the roadmap for the cess beyond its expiry.

These proposal are the part of this broader discussion, the GST Council has constituted a 10-member Group of Ministers (GoM) to review taxation on luxury, sin, and demerit goods post-cess. The panel, chaired by Minister of State for Finance Pankaj Chaudhary, is also exploring options to rebalance tax rates across categories, including essential goods.

One such proposal involves reducing the GST rate on essential items, including many daily-use and pharmaceutical products, from 12% to 5%.

Sources said active deliberations over reduction in the number of slabs to three, possibly by abolishing the 12% slab is underway.

"Several goods, including some food items, could move to 5% slab, if the 12% rate is done away with, while some could shift to the higher slab of 18%," a source privy to the discussion said.

The GST Council, which is expected to convene soon, may take up the matter for discussion.

Sources say that while the Centre is keen on abolishing 12% GST slab, states are suggesting modification in the existing tax structure. The six-member panel, headed by Bihar Deputy Chief Minister Samrat Chaudhary, may pitch for gradually shifting the items to either lower or upper bracket

Goods which are currently under 12% slab includes processed food, almonds, packaged water and nuts, along with services like hotel accommodation, and passenger transport by air in non-economy classes etc.

The Fitment Committee, comprising of revenue officials from both the Centre and states, are learnt to have put forward three options for consideration: 7%-14%-21%, 16%-18%-24%, and 9%-18%-27%, with the aim of simplifying the tax regime while maintaining revenue neutrality.