After wheat or paddy, an important commercial crop grown in India is tobacco. India stands in the list of top 10 largest tobacco producing countries in the world, renowned for its stimulant rich full-bodied flavours and smoothness. India is not only a major producer of tobacco but also a leading exporter.
Like all other goods and services, indirect taxes like VAT and Excise duty charged on tobacco products have been subsumed under the GST Act. Citing health concerns, tobacco has been taxed under the highest slab rate of 28% by the GST Council. GST Compensation Cess and National Calamity Contingency Duty (NCCD) are levied additionally. The GST Compensation Cess, prima facie, is being levied to create a corpus for compensating states for any loss of revenue by implementing GST Act, which has subsumed over a dozen central and state levies. Despite the ever-growing taxes and strict laws put in place by the Indian government to curb the use of tobacco and tobacco products, the Indian tobacco industry seems to be unfettered.
However, an interesting point of focus here is India’s unique tobacco consumption pattern. While cigarettes are usually the leading segment in most countries,
- 89% of the Indian tobacco industry is led by the sale of chewing tobacco, Zarda, bidi, and illegal cigarettes.
- Only 11% of total tobacco is consumed in the form of legal cigarettes, whereas the market for cigars is still at a nascent stage.
This is an exception to the rest of the world where cigarettes account for around 90% of total consumption. Albeit such a meagre consumption share of 11%, 87% of government’s tobacco revenue is from legal cigarettes subject to high and discriminatory rates of taxation.
Yet, the effect of increased tax rates in regulation with the rules provided for GST Tariff for Commodities on tobacco variants except cigarettes has been compensated by a decrease in prices that confirms that GST roll-out has not had much of an impact. To be specific, the impact has been negligible in the case of bidis. Also, the price of a bidi or smokeless tobacco is significantly lower than of a cigarette even under the GST regime, the former is a cheaper source for consumers from the low-income segment of society.
Pricing of 1 Cigarette Under GST With an Example
ITC manufactures cigarette, chewing tobacco, and pan masala.
| Particulars | Cigarettes under 65mm | Cigarettes between 65mm to 70mm | Cigarettes between 70mm and 75mm | Cigarettes above 75mm | Pan masala | Pan masala with gutkha (tobacco) |
| Value per unit (A) | Rs 5 | Rs 10 | Rs 15 | Rs 15 | Rs 5 | Rs 10 |
| Probable maximum cessof the value of goods or transactions. (B) | Rs 0.25 (5%) | Rs 0.50 (5%) | Rs 0.75 (5%) | Rs 0.75 (5%) | Rs 3 (60%) | Rs 20.40 |
| Probable cess per 1000 sticks (C) | Rs 1.591 | Rs 2.876(non-filter) and
Rs 2.126 (filter) |
Rs 2.876(both filter and non-filter) | Rs 4.170(both filter and non- filter) | Not applicable | Not applicable |
| GST rate @28% (D) | Rs 1.40 | Rs 2.80 | Rs 4.20 | Rs 4.20 | Rs 1.40 | Rs 2.80 |
| Probable price that can be charged on products (A + B+C+D) | Rs 8.016 | Rs 16.176 (non-filter) Rs 15.426(filter) |
Rs 21.502 (both filter and non-filter) | Rs 24.12 | Rs 9.40 | Rs 33.20 |
Cigars and cigarillos will be charged at the rate of 28% and an additional cess up to 21% or Rs 4.170 per stick would be levied. Chewing tobacco has also been kept under the 28% category and an additional cess of 142% would be levied upon chewing tobacco (with lime tube) and 160% on chewing tobacco (without lime tube).
Conclusion
The new GST regime has had an adverse effect on the production as well as the trading sector despite the refund of tax paid on shipments. Even the benefit of GST composition scheme, under which lower tax rate is applicable, provided the turnover does not exceed the specified limit, is not allowed to the manufacturers. For the returns, they need to file GST online monthly.
But then the real victims of increased taxes are the small tobacco farmers, as 5% GST has been imposed on tobacco leaves and 28% on unmanufactured tobacco (unbranded). The Tobacco Institute of India said increased cess and taxes have put severe pressure on the legal cigarette industry, adversely impacting Indian tobacco farmers and revenue collection, and this has led to an increase smuggling and illicit cigarette trade. Various studies on the tobacco sector indicate significant tax evasion by players in the unorganized sector.
The government can implement a policy that changes or shapes the social behaviour in the business environment. While the increase in tax on sinful goods is always appreciated, a fine balance is desired by maintaining the right tax rates for this segment, which discourages usage, as well as prevents any detrimental business practices.
