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FM Nirmala Sitharaman: Until compensation loans are paid, cess on tobacco products to stay

At its meeting, the GST Council gave its nod to a two-tier rate structure of 5 per cent and 18 per cent, with Sitharaman saying the reform was carried out “with a focus on the common man”.

Finance Minister Nirmala Sitharaman: Until compensation loans are paid, cess on tobacco products to stayFinance Minister Nirmala Sitharaman with Minister of State Pankaj Chaudhary on Wednesday. (PTI)

GST Council Meeting 2025: While hundreds of goods and services will see new Goods and Services Tax (GST) rates from September 22, tobacco and related products will continue to operate under the current system — along with the additional cess — until the amount borrowed by the government during the pandemic years to compensate states for shortfall in revenue is paid back, Finance Minister Nirmala Sitharaman said Wednesday.

“Pan masala, cigarettes, gutkha, and other tobacco products such as chewing tobacco, products like zarda, unmanufactured tobacco and beedi will continue at their existing rates of GST and compensation cess, where applicable, until the loan and interest payment obligations under the compensation cess account are completely discharged,” Sitharaman told reporters

She said after the loan repayments are met, there will not be any cess and those items which attracted the compensation cess will attract a special rate of 40 per cent.

While Sitharaman did not specify when the loans will be paid back, she expects it to happen “well within…this calendar year”. The GST Council has also authorised the Finance Minister to stop collecting cess the moment the loan is repaid.

The Central government had borrowed Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans to meet a part of the shortfall in cess collections. As per the Union Budget for 2025-26, the government expects to collect Rs 1.67 lakh crore as compensation cess in the current fiscal, with repayment to the tune of Rs 67,500 crore for these back-to-back loans scheduled for the year.

Previously, Rs 78,104 crore was paid back in 2023-24 and Rs 1.24 lakh crore in 2024-25, as per the Budget documents.

Source: CBIC

Revenue ‘implication’

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At its meeting, the GST Council gave its nod to a two-tier rate structure of 5 per cent and 18 per cent, with Sitharaman saying the reform was carried out “with a focus on the common man”.

“Every tax levied on common man’s daily use items has gone through a rigorous look into. And, in most cases, the rates have come down drastically,” she said.

In the lead up to the GST Council’s meeting, economists had warned of significant loss in revenue to both the Centre and state governments. However, at the press conference, Finance Ministry officials insisted that ‘loss’ was not the correct characterisation of the impact of the Council’s decisions.

“We expect that the net fiscal implication – we would not call it a revenue loss because that doesn’t seem to be the correct terminology – but the net revenue implication of this proposal… we have estimated it to be around Rs 48,000 crore. This is on the consumption base of 2023-24, because that is where we had all the segregated data,” Revenue Secretary Arvind Shrivastava said.

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Shrivastava said the entire GST rate rationalisation exercise will be “fiscally sustainable” for both the Centre and the states. Looking at a particular number, he said, and “highlighting it in a manner which is not proper may not present the correct picture of this exercise”. This, he said, was due to a variety of factors, including a change in consumer behaviour due to reduced indirect tax rates, higher buoyancy and improved compliance.

Economists, however, have predicted a loss in revenue for the government at both the Central and state level. In a note on August 19, HSBC economists had estimated that the rate rationalisation exercise could cost the exchequer around Rs 1.43 lakh crore, or 0.4 per cent of GDP.

“In the GST spirit, this could be equally split between the central and state governments,” HSBC had said. At the same time, they had said that the tax cuts could spur demand across products, while efficiency gains from moving to a simpler and more predictable tax regime with fewer rates could raise India’s potential growth rate over time.

Asked about the impact of the GST rate cuts on the GDP at the press conference Wednesday, Sitharaman said it was too early to make any calculation.

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“Once you have a couple of months going with all the purchases, then we will be able to get some numbers. It will be too much for me to speculate on it now. But I think it will have a very positive impact on the GDP,” she said.

Siddharth Upasani is a Deputy Associate Editor with The Indian Express. He reports primarily on data and the economy, looking for trends and changes in the former which paint a picture of the latter. Before The Indian Express, he worked at Moneycontrol and financial newswire Informist (previously called Cogencis). Outside of work, sports, fantasy football, and graphic novels keep him busy.   ... Read More

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