Cigarettes won't be cheaper under GST

The peak GST rate of 28 per cent as also the 5 per cent ad valorem cess will continue

The GST Council on Monday raised the cess on cigarettes to take away an estimated Rs 5,000 crore (Rs 50 billion) annual "windfall" manufacturers could have reaped from lower GST rates, Finance Minister Arun Jaitley said.

However, cigarette prices will not change as a result of the increased cess which would be effective from midnight.

This was the first meeting of the Council after the Goods and Services Tax (GST) was rolled out on July 1.

Briefing reporters after an emergency meeting of the council was held through video conferencing, Jaitley said it had previously fixed a peak GST rate of 28 per cent on cigarettes.

On top of it, a cess was levied to create a corpus for compensating states for any loss of revenue from implementing the GST, which subsumed over a dozen central and state levies.

The cess was made up of 5 per cent ad valorem rate and a fixed per thousand stick rate based on length of cigarettes.

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 in the range of Rs 485 and Rs 792 per thousand sticks, he said.

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.

"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.

The cess which was earlier fixed by the GST Council had resulted in a windfall profit for cigarette companies.

"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 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 mm to 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 currently.

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 other cigarettes, the cess would be 36 per cent plus Rs 4,170 per thousand sticks as compared to 5 per cent plus Rs 4,170 currently.

Jaitley said the rates fixed in May were lower than the pre-GST tax incidence and the choice before manufacturers was either to pass on the lower taxes to consumer by way of cutting rates or pocketing the windfall.

He said the GST Council noticed this "lacunae" and convened an early meeting and an unanimous decision was taken after taking views of all states. The meeting of the council was originally slated to happen on August 5.

Jaitley said to correct the anomaly, the GST Council has raised the fixed cess by Rs 485 to 792 per thousand sticks.

Consumer prices will, however, not change as the increased tax incidence would only take away the windfall profits the manufacturers were earning, the finance minister said.

Jaitley also said the GST Council will meet in the first week of August to review the progress of the implementation of GST, which was rolled out on July 1.

The minister further said that over 70 lakh excise, service tax and VAT assessees have migrated to the GSTN portal and over 500,000 new registrations have happened.

"This figure is almost multiplying everyday. 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.

So far, the functioning has been fairly smooth and both the Centre and state governments are responding to all the queries which are being raised. The GSTN portal is able to comfortably take this load, he added.

Asked if the tax rates on textiles would be reduced, Jaitley said the council would consider all the suggestions.

“Let us see, it is too early to comment on this," he said when asked if GST rates could be tweaked further.

"In a large number of products we have seen that input credit helps in bringing down the cost," he said.

Photograph: Reuters