The tobacco industry is booming as evident by the balance sheet of ITC. Many reports have been released by WHO claiming that India is harboring the world’s highest incidence of mouth cancer. We are the second largest consumers of tobacco, having an astonishing 275 million users! But how will GST affect this multi-million dollar industry? Let us see the impact of GST rates on the tobacco industry in India.
In the past decade, excise duty rates have been revised for cigarettes and other tobacco products, but locally manufactured bidi was exempted. GST tax rate on tobacco and tobacco-related products was declared on 18th May by the GST council.
Impact of GST Rate on the Tobacco Industry
Excise duty is charged on the manufacturing of cigarettes, bidi, and other chewing tobacco products at different rates.
Cigarette – 64%
Bidi – 22%
Chewing products – 81%
A lot of revenue is generated from the sale of tobacco for the Indian government. Although the tax burden levied on the Indian tobacco industry is not enough as per the recommendation of the WHO for a tax burden of 75% on all tobacco-related products. There has been an increasing demand for a higher tax burden on the tobacco manufacturers.
Under GST, there will be an additional cess charged on the tobacco-related products, over and above the GST charged at the rate of 28%.
Let’s Understand the 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 cess
of 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
(both filter and non-filter)
(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 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).
Impact on the tobacco industry is going to be largely neutral since the 5% cess declared by the Indian government was less than the expected rate by the tobacco industry. There will be an increase in the expense of smokers due to the rise in the price of a cigarette in the initial period. Although, it is expected that the tobacco industry, irrespective of the tax rate, would have a neutral effect due to the implementation of GST.