GST Council increases cess on cigarettes

Union Finance Ministry Arun Jaitley on Monday announced that GST Council has chose to hike cess on cigarettes to take away the windfall manufacturers were making.

In an urgent meeting of the Goods and Services Tax (GST) Council on Monday, the first after the GST rollout and 19th in total, the Centre and the states made a decision to increase the cess on cigarettes to remove the anomaly of lower effective tax incidence that had followed after the recent scrapping of additional excise duty on cigarettes. If the price of cigarettes come down, the government may not look at levying central excise duty but may consider increasing the cess on the demerit good.

Up to 65 mm length: Increase of Rs 0.485 per cigarette.

The GST Council will meet next in the first week of August to review the progress of the new tax regime’s implementation, Jaitley said. 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.

After the rollout of GST, excise duty has automatically been removed on tobacco products. “It has been corrected and the pre-GST rates restored”, he said.

The GST Council meeting on Monday was the first after the roll-out of the indirect tax reform a fortnight ago. “This itself indicates an expansion of tax base”, Jaitley said. The new cess rate for non-filter and filter cigarettes of length not exceeding 65 mm would be 5 per cent plus Rs 2,076 per thousand sticks.

According to Morgan Stanley, which increased target price on the stock to Rs 395 from Rs 310, the key risk would be sharp increase in cigarette tax in the next Budget (likely February 2018).