GST on cigarettes, tobacco, aerated beverages may be hiked to 35%

04-12-2024

The Group of Ministers (GoM) on GST Rate Rationalisation met on December 2, 2024, and proposed significant changes to the Goods and Services Tax (GST) structure.
1. GOM stands for Group of Ministers, which is a committee formed by the Government of India to address various issue
These changes primarily affect sin goods like cigarettes, tobacco products, and aerated beverages, as well as apparel.

Next Steps:

The GoM report will be reviewed and discussed in detail by the GST Council during its meeting on December 21, 2024.
The GST Council, chaired by the Union Finance Minister, will have the final say on the proposed tax changes.
There may be further discussions on periodic rationalisation of GST rates in future meetings of the Council.

Key Proposals by the GoM

GST Rate on Sin Goods:
The GoM has proposed a new 35% GST rate on certain sin goods like:
1. Cigarettes
2. Tobacco products
3. Aerated beverages
Currently, these goods are taxed at a 28% GST under the four-tier GST system.
The introduction of a 35% rate aims to curb the consumption of these goods, which are often associated with negative health and environmental impacts.
Additionally, these goods attract a cess on top of the GST, making them more expensive and discouraging consumption.
1. Cess is a form of tax and an additional levy by the Central Government to raise funds for a specific purpose
GST Structure on Apparel: The GoM also proposed changes to the GST rate on readymade garments based on their price:
1. Garments costing up to ₹1,500: GST reduced to 5% (from the current 12%).
2. Garments costing between ₹1,500 and ₹10,000: GST would be 18%.
3. Garments costing above ₹10,000: GST would be 28%.
This proposal aims to simplify the tax structure and make clothing more affordable for the middle-income group, while ensuring that luxury apparel is taxed at a higher rate.
Overall GST Rate Rationalisation: The GoM report proposes tax adjustments on a total of 148 items.
The expected net revenue impact of these changes is positive, meaning the government expects an increase in tax collections due to the adjustments.
These items cover a variety of sectors, including goods such as packaged water, bicycles, and exercise notebooks.

The 4-Tier GST Structure:

Currently, the GST system in India is organized into four tax slabs:

5%: For essential goods.
12%: For items of medium importance.
18%: For standard goods.
28%: For luxury and demerit goods (e.g., high-end cars, tobacco, aerated beverages).

In addition to these, there are cesses applied on demerit goods like cigarettes and aerated drinks, further increasing their tax burden.

Other Proposals Discussed in Previous GoM Meetings

Packaged Drinking Water: The GoM has proposed reducing the GST on packaged drinking water (20 liters or more) from 18% to 5%.
Bicycles: The proposal to reduce the GST on bicycles costing less than ₹10,000 from 12% to 5%.
Exercise Notebooks: A proposal to reduce GST on exercise notebooks from 12% to 5%.
Luxury Shoes: GST on shoes costing above ₹15,000 would be increased from 18% to 28%.
Luxury Watches: The GoM suggested increasing the GST on wristwatches costing above ₹25,000 from 18% to 28%.

Implications of the Proposed Changes

The proposed 35% GST on cigarettes, tobacco products, and aerated beverages could discourage consumption of these products, especially cigarettes and tobacco, which are harmful to health.
It could lead to increased revenue collection for the government but may also raise concerns about the price elasticity of demand for these goods. A higher tax could drive some consumers to the black market for cheaper products.
The proposal to simplify tax rates on apparel based on price range will likely reduce the tax burden on middle- and lower-income consumers.
The differentiation between lower-priced garments (5% GST) and luxury garments (28% GST) will make the tax structure more progressive, benefiting the less wealthy while taxing the affluent more.
The overall restructuring and tax changes are expected to boost government revenue.
The GST rate adjustments on 148 items will contribute to a more balanced tax system while focusing on fairness and revenue generation.

What is GST?

GST (Goods and Services Tax) is a comprehensive indirect tax system implemented in India on July 1, 2017.
It was introduced through the 101st Constitutional Amendment Act of 2016.
It replaced a complex system of multiple state and central taxes, aiming to streamline the taxation structure, reduce cascading taxes, and create a unified tax system across the country.

Key Features of GST:

Single Tax for Goods and Services: GST combines multiple indirect taxes such as VAT (Value Added Tax), excise duty, service tax, customs duties, and others into one unified tax.
Multi-stage Taxation: GST is a value-added tax that is levied at each stage of production or distribution, but with a set-off mechanism for taxes paid at previous stages. This avoids the cascading effect of taxes (tax on tax).
Dual GST Structure:
1. Central GST (CGST) – Collected by the central government on intra-state sales.
2. State GST (SGST) – Collected by state governments on intra-state sales.
3. Integrated GST (IGST) – Collected by the central government on inter-state sales.
GST Rates:
1. Goods and services are taxed at different rates, ranging from 0% (for essential items) to 28% (for luxury and non-essential items). Some items, like food and healthcare, are exempt from GST or taxed at lower rates.
2. The main GST rates are 5%, 12%, 18%, and 28%, with some items having different rates depending on their nature.

Key Articles Amended/Inserted

1. Article 246A: Special Provision for GST

This new article grants both the Parliament and the respective State/Union Legislatures the power to make laws concerning GST.

Exclusive power to Parliament: The Parliament has exclusive authority to legislate on inter-state supplies of goods and services (this is dealt with under the IGST Act).
Exclusions: Certain products, including petroleum crude, diesel, motor spirit (petrol), natural gas, and aviation turbine fuel, are excluded from GST until a date recommended by the GST Council.

2. Article 269A: Levy and Collection of GST for Inter-State Supplies

This article defines the mechanism for the levy and collection of GST on inter-state supplies, i.e., transactions between two or more states.

Revenue sharing: The revenue from inter-state supply is shared between the Centre and the States, with the GST Council framing rules for the distribution.
Import transactions: The import of goods and services is treated as inter-state supply, thus attracting Integrated GST (IGST). This allows businesses to avail of input tax credit on IGST paid on imports, which was not possible under the previous taxation system.

3. Article 279A: GST Council

This article authorizes the President of India to constitute the GST Council, which plays a crucial role in the development, implementation, and regulation of GST laws.

The GST Council is a joint forum for the Centre and States and consists of the Finance Minister of the Union and State Finance Ministers.
It is responsible for making recommendations on issues like rate structure, tax base, and compensation to States.

4. Article 286: Restrictions on Tax Imposition

Amendment: Article 286 was modified to restrict states from passing laws that would impose taxes on the sale or purchase of goods outside their state or during the import of goods and services.
The term “sale or purchase” was replaced by "supply" to align with the GST framework.

5. Article 366: Addition of Important Definitions

This article defines key terms within the GST framework:

Goods and Services Tax (GST): This tax is defined as the tax on the supply of goods, services, or both. It excludes alcoholic liquor for human consumption from the scope of GST.
Services: Defined as anything other than goods.
State: The term "State" now includes Union Territories with legislatures.

Compensation to States Under GST

One of the major concerns with the introduction of GST was the potential revenue loss for States, especially in the initial years of implementation. To address this:

The GST Compensation Act (2017) was enacted, guaranteeing compensation to States for any loss of revenue due to the introduction of GST.
Compensation Period: States were guaranteed compensation for a period of five years, which could be extended if necessary, depending on the revenue growth.

Under the GST framework, the following adjustments were made:

Petroleum Products: The Centre retains the right to levy excise duties on five petroleum products (crude oil, high-speed diesel, motor spirit, natural gas, and aviation turbine fuel).
States also have the power to levy taxes on these products.
Tobacco and Tobacco Products: These products remain subject to both excise duty and GST.
Entertainment Tax: The entertainment tax was abolished at the national level, but it remains under the jurisdiction of local bodies (e.g., municipal corporations) for specific types of entertainment services.

Benefits of GST:

Simplified Tax Structure: It removes the complexities of the previous system and integrates taxes across the country.
Reduced Tax Cascading: The input tax credit mechanism helps avoid the tax-on-tax effect.
Boost to 'Make in India': By reducing the cost of goods, GST has the potential to improve the manufacturing sector and boost exports.
Enhanced Transparency and Compliance: The online filing system, along with automated processes, reduces human intervention and promotes greater tax compliance.
Economic Growth: By simplifying business processes and increasing tax compliance, GST is expected to contribute to higher economic growth in India.