To offset ‘windfall profit’ for firms, GST Council hikes cigarette cess

The GST Council had on May 18 fixed 28 per cent as the top rate for cigarettes. A 5 per cent ad valorem cess was levied on top of it and Rs 1,591 per thousand sticks as fixed cess on both filter and non-filter cigarettes of not exceeding 65 mm length.

By: ENS Economic Bureau | New Delhi | Published: July 18, 2017 2:21 am
cigarette price, cigarette price increased, cigarette cess hike, GST, goods and services tax, arun jaitley, indian express news, india news, business news The GST Council had earlier fixed a peak rate of 28 per cent on cigarettes along with a cess, which consisted of an ad valorem rate of 5 per cent and a fixed amount per thousand sticks, based on length of cigarettes.

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 decided 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. The government will reap an amount of Rs 5,000 crore per annum on account of the revision of cess rates, effective from midnight, that is, July 18.

The GST Council had earlier fixed a peak rate of 28 per cent on cigarettes along with a cess, which consisted of an ad valorem rate of 5 per cent and a fixed amount per thousand sticks, based on length of cigarettes. Briefing reporters after the Council’s meeting, held through video conferencing, finance minister Arun Jaitley said that the peak GST rate of 28 per cent as also the 5 per cent ad valorem cess will continue but the fixed cess has been hiked by
Rs 485-792 per thousand sticks.

The hike has been necessitated as the GST rate together with cess was found to be lower than the combined incidence of central excise, state VAT and other levies put together and had resulted in a “windfall profit” for cigarette companies.

“Now the total revenue gain of this is estimated to be about Rs 5,000 crore per annum and this gain otherwise would have either resulted in reduction of cigarette prices or would have gone as balance profit to the cigarette companies,” Jaitley said.

He further said, “There were two things that the cigarette companies could do — either reduce the price of cigarette, which because of the health consequences of cigarettes is not a very desirable thing. So they probably would have resorted to the other option of transferring this windfall profits to their balance sheet. This was not the intention of the Council.” He said the GST Council noticed this “lacunae” and convened an early meeting and a unanimous decision was taken after taking views of all states. The meeting of the Council was originally slated to happen on August 5.

The GST Council had on May 18 fixed 28 per cent as the top rate for cigarettes. A 5 per cent ad valorem cess was levied on top of it and Rs 1,591 per thousand sticks as fixed cess on both filter and non-filter cigarettes of not exceeding 65 mm length. 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. For non-filter cigarettes of 65-70 mm length, the rate would be 5 per cent plus Rs 3,668 per thousand sticks as against 5 per cent plus Rs 2,876 earlier. Filter cigarettes of 65 to 70 mm length would now attract a 5 per cent plus Rs 2,747 per thousand stick cess as compared to present 5 per cent plus Rs 2,126. The same for 70 mm to 75 mm cigarettes would be 5 per cent plus Rs 3,668 per thousand sticks.

For cigars, cheroots and cigarettes of tobacco or of tobacco substitutes, the cess would be 36 per cent plus Rs 4,170 per thousand sticks as compared to 5 per cent plus Rs 4,170 earlier.

The minister further said that over 70 lakh excise, service tax and VAT assessees have migrated to the GSTN portal and over 5 lakh new registrations have happened. “This figure is almost multiplying every day. From this it comfortably looks like that the original number of applicants which included duplication… which was 80 lakh, I think we are almost on the verge of crossing that figure. This itself indicates an expansion of tax base,” Jaitley said.

Asked if the tax rates on textiles would be reduced, Jaitley said the Council would consider all the suggestions. The next meeting of the GST Council is scheduled to be held on August 5 to review the progress of the implementation of GST, which was rolled out from July 1.

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