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GST impact: Council increases cess on cigarettes

Dilasha Seth & Indivjal Dhasmana/New Delhi 18 Jul 17 | 02:33 AM

Photo: Reuters

In an out-of-turn meeting, the Goods and Services Tax (GST) Council meeting on Monday raised the cess on cigarettes, in a bid to reduce profiteering by companies and harm to public health. The exact amount of the cess would depend on the length of the cigarettes.

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At present, cigarettes are taxed at the peak rate of 28 per cent, along with a cess of 5 per cent. This is lower than what it was before the July 1 roll-out of the new tax regime. The increase will give Rs 5,000 crore extra revenue to the Centre’s exchequer; this will be used for compensating states.

Cess on cigarettes of up to 65 mm was raised by Rs 485 per 1,000 sticks in the case of both filter and non-filter ones. Those longer than 65 mm had different cess rates — it increased by Rs 792 per 1,000 sticks for non-filter ones; for filtered ones, between 65 mm and 70 mm, the cess was raised by Rs 621 per 1,000 sticks and for those between 70 mm and 75 mm, it was increased by Rs 792 per 1,000 sticks. 

In the case of cigars and king-sized cigarettes (84 mm), the cess changed to 36 per cent from 5 per cent, while the specific or fixed cess remained the same. 

Also, 500,000 new assessees have registered on the GST Network (GSTN) since it was opened on June 25, taking the total number of assessees, old and new, to 7.5 million.

After the meeting, conducted over video conferencing, Finance Minister Arun Jaitley said, “It was noted in the first 15 days of GST implementation that the rate on cigarettes did not factor in the cascading effect of taxes. We noted that cigarette firms were getting windfall profits from the reduction in cigarette prices."  

Cigarette manufacturers had not reduced prices so far.

The FM said the states had unanimously agreed to change the cess on cigarettes. The Council was earlier scheduled to meet on August 5, but an urgent meeting was called on Monday to address the issue of cess on cigarettes. Asked whether the Council would consider the demands of textile industries, Jaitley said all request received from various associations would be considered.

On registration, he said 250,000 people were yet to join the GSTN, and he hoped the total would cross 8 million, which it was under the old taxation system. The GSTN opened for Suvidha providers on Monday for a week; it would be open for invoice uploading from July 24. Based on the weighted average value-added tax rate of 28 per cent, the Council had in May fixed the GST on cigarettes at the same rate, with an additional compensation cess.  

However, this method of calibrating the compensation cess did not take into consideration the cascading of taxes. As a result, the total tax incidence on cigarettes in the GST regime came down. Manufacturers could have passed the lower taxes to consumers by way of cutting prices but they did not. Prices are unlikely to change as the cess would only eat into the windfall profits of cigarette makers. Vishal Raheja, senior consultant with Taxmann, said the move would impact prices of cigarettes adversely. The GST Council will meet in the first week of August to review the progress of the implementation of the tax.

Experts praised the way the GST Council held an emergency meeting to address the issue of cess on cigarettes.  M S Mani of Deloitte said the Council could have had addressed the issue of the GST rates on textiles as well. But he did not rule out the Council holding another meeting between now and August 5.

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