Govt’s GST Reforms: Why Proposed 40% Tax on Cigarettes Has Sparked Fiscal Feud Between Centre and States?

Narendra Modi-led government’s upcoming next-generation Goods and Services Tax (GST) reforms are likely to make tobacco products more expensive in the country. The centre is mulling to levy 40% GST on products containing tobacco, like cigarettes, to compensate for the revenue loss that is likely to happen due to potential tax relief on other categories of goods. 

The move seems to have already divided the centre and some states, who are seeking a “significant share” in the additional taxation on tobacco products to recover potential revenue loss, the Economic Times reported. 

“During the discussion some states asked for equal share on the additional duty to be imposed,” ET reported, citing a source.

Presently, GST is levied at 5, 12, 18 and 28%. While food and essential items are either taxed at 0% or 5%, luxury and demerit goods attract 28% along with a cess. The central government has proposed a two-tier GST structure of 5 and 18% along with a 40% special rate for luxury and sin goods. 

The 5 and 8% slabs will attract items under the categories of ‘merit’ and ‘standard’ and the 40% will be applicable on 5-7 items only, including demerit goods like pan masala, tobacco and online gaming. The government’s proposed move aims to shift 99% of the goods in the current 12% slab to 5% and 90% of the goods and services in the 28% slab to the 18% bracket. 

The final decision regarding the matter will be taken in the upcoming GST council meeting. But prior to that Finance Minister Nirmala Sitharaman will hold a two-day meeting with the Group of Ministers (GoM) on GST rate rationalisation on August 20-21. 

“The central government has sent its proposal on GST rate rationalisation and reforms to the Group of Ministers (GoM) constituted by the GST Council to examine this issue,” said the Finance Ministry in a post on X on August 15.