How to Calculate GST on Cigarettes, Pan Masala & Gutkha using RSP-Based Valuation?

Effective February 1, 2026, GST on specified tobacco goods will shift from the traditional transaction-based system to a Retail Sale Price (RSP)-based valuation. This new system can impact how businesses calculate GST and report taxes on their products. In this guide, we’ll cover everything you need to know about the RSP-based valuation system, its application, and compliance reporting under GST.

Key Takeaways

• GST on specified tobacco goods is now calculated using the RSP, not the actual sale price between the buyer and seller.
• The deemed taxable value is derived from the RSP after applying a prescribed formula, regardless of the actual transaction price.
• Businesses must adjust their reporting in e-Invoices, e-Way Bills, and GSTR-1 to accommodate RSP-based taxation.
• Accurate classification and reporting of notified tobacco goods under the RSP formula is critical to avoid penalties.
• Existing systems will need to be updated to support RSP-based calculations and reporting, ensuring that tax amounts and taxable values are correctly aligned.

What Is RSP-Based Valuation under GST?

RSP-based valuation is a new GST compliance method where the tax is calculated based on the Retail Sale Price (RSP) of specified tobacco goods rather than the transaction price. This method was introduced through Central Tax Notification No. 20/2025  dated December 31, 2025 and is effective from 1 February 2026.

RSP is the maximum price declared on goods at which such goods in packaged form may be sold to the ultimate consumer and includes all taxes, duties, surcharge or cess by whatever name called.

List of Notified Tobacco Goods under RSP-based Valuation

The following tobacco goods are notified for RSP-based valuation under GST:

• HSN 2106 90 20: Pan Masala
• HSN 2401: Unmanufactured tobacco and tobacco refuse (excluding tobacco leaves)
• HSN 2402: Cigars, cheroots, cigarillos, and cigarettes (tobacco or tobacco substitutes)
• HSN 2403: Other manufactured tobacco, homogenised or reconstituted tobacco, tobacco extracts, and essences (other than biris)
• HSN 2404 11 00: Products containing tobacco for inhalation without combustion
• HSN 2404 19 00: Products containing nicotine substitutes for inhalation without combustion

These products must have their GST calculated based on the RSP printed on the packaging.

When Is RSP-Based Valuation Applicable?

RSP-based valuation applies from February 1, 2026, to the specific tobacco goods listed above. The key criteria are that these goods must have RSP printed on their packaging. Any sales of these goods, even if the transaction price differs from the RSP, will be subject to GST calculation based on the printed RSP.

How to Calculate GST under RSP-Based Valuation?

GST on RSP-based goods is calculated using the following formula:

Tax Amount = (RSP × GST Rate) / (100 + Sum of applicable tax rates)
Deemed Taxable Value = RSP − Tax Amount

This formula ensures that the GST payable is derived from the RSP, making it consistent for all suppliers of the listed tobacco goods.

GST Rate Applicable on RSP-Valued Tobacco Goods

All tobacco goods subject to RSP-based valuation are uniformly taxed at 40% GST, irrespective of the product classification. This includes products such as cigarettes, cigars, pan masala, and other tobacco substitutes.

Challenges with Current GST Systems

Currently, the GST reporting systems, such as e-Invoice, GSTR-1, and e-Way Bill, are designed to handle transaction-based tax calculations. The transition to RSP-based valuation poses several challenges, such as:

• System Validation Conflicts: The current systems validate that the sum of the taxable value and tax amount cannot exceed the total invoice value. Under RSP-based valuation, the total invoice value is derived from the RSP, resulting in discrepancies with the current validations.
• Complex Reporting Adjustments: Taxpayers must manually adjust their systems' tax calculations to reflect RSP-based values, which can lead to errors if not appropriately handled.

Advisory Guidance on Reporting in GST Systems

With the implementation of RSP-based valuation for notified tobacco goods, businesses must adjust their reporting processes in both the e-Invoice, e-Way Bill, and GSTR-1 systems. The following example demonstrates how to report taxable values, tax amounts, and total invoice values across these systems.

Let’s consider the following scenario for a tobacco product (HSN Code: 2403 - Cigars, cheroots, etc.):

RSP per Pack: ₹100
Number of Packs: 1,000
Total RSP (Aggregate): ₹100 × 1,000 = ₹1,00,000
GST Rate: 40%
Net Sale Value (Commercial Consideration): ₹60,000 (after discount)
Discount: ₹20,000

• Tax Amount = (₹1,00,000 × 40) / (100 + 40) = ₹28,571.43
• Deemed Taxable Value = ₹1,00,000 − ₹28,571.43 = ₹71,428.57
• Total Invoice Value: ₹60,000 (Net Sale Value) + ₹28,571.43 (Tax Amount) = ₹88,571.43

Reporting in e-Invoice, e-Way Bill, and GSTR-1:

1. Taxable Value:

• Report ₹60,000 as the taxable value, which is the Net Sale Value of the product.

2. Tax Amount:

• The tax amount is ₹28,571.43, calculated using the RSP-based formula.

3. Total Invoice Value:

• The total invoice value should be ₹88,571.43, equal to the Net Sale Value (₹60,000) plus the Tax Amount (₹28,571.43).