GST cess on cigarettes hiked; will fetch extra Rs 5,000 cr to tax kitty

The euphoria around cigarette companies’ stocks is set to die down. The GST Council on Monday increased compensation cess on cigarettes to take away the ‘windfall’ gains made by manufacturers of the sin item. The additional cess on cigarettes of up to 65 mm has been raised by Rs 485 per thousand sticks, while on those exceeding 65 mm it will go up by Rs 792.

Consumer prices will, however, not change as the increased tax incidence would only take away the windfall profits cigarette-makers have earned after the GST rollout from July 1.

Finance minister Arun Jaitley said the revised cess would be effective from midnight on Monday and will bring additional revenue of Rs 5,000 crore to the tax kitty. He said that the cess had been hiked to take away the windfall, which manufacturers were reaping due to an anomaly that crept in after the GST rate fixation.

Investors seemed to be apprehensive of impending hike in cess with stocks of both major cigarette-makers ITC and Godfrey Phillips declining on the bourses.
ITC Ltd shares fell 3.40 per cent to Rs 325.75 on the BSE at the close of market hours on Monday reflecting weak investor sentiment.

Shares of Godfrey Phillips dipped 2.57 per cent to Rs 1,227.50 on speculation of higher cess.

In the new indirect tax regime, tobacco products such as cigarette, cigar and pan masala attract peak GST rate of 28 per cent besides 5 per cent ad valorem cess and an additional fixed cess. The additional fixed cess on cigarette varies from Rs 2,126 to Rs 4,170, depending on their length.

The GST Council had in May fixed 28 per cent tax rate for cigarettes. A five-per cent ad valorem cess was levied in addition and Rs 1,591 per thousand sticks as fixed cess on both filter and non-filter cigarettes of length not exceeding 65 mm. But this rate was lower than the pre-GST tax incidence. Some brokerage firms estimated it to be about 8 per cent lower than the previous regime.

While tax incidence came down on lower rate in the GST, manufacturers did not cut prices and pocketed the additional profits.

The lower tax was mainly the result of government dropping additional excise duty on cigarettes in the new tax structure.

The GST has subsumed most of indirect taxes levied by Centre and states such as services tax, VAT, countervailing duty, central sales tax, luxury tax and entertainment tax.

The new tax structure kicked in from July 1 amidst hope that it will significantly boost the economy and enhance compliance.

The GST Council, the apex decision-making body in the new regime, will meet in first week of August to review the progress of the implementation of new indirect tax.