GST, Cess Levy Together to Help Detect Evasion in Pan Masala Sector: Sources

The combination of GST and the machine-capacity-based cess levy on pan masala manufacturing will create a comprehensive tax architecture that improves detection of evasion and protects tax revenue, sources said.

The Finance Ministry has notified a health and national security cess on pan masala manufacturing, on top of the highest 40% Goods and Services Tax (GST) rate, effective February 1. The total tax incidence will be at the existing level of 88%.

Currently, 28 per cent GST plus a compensation cess is levied on pan masala. Beginning February 1, GST will be levied as a percentage of the retail sale price of pan masala, and the cess will be levied on the installed production capacity of the manufacturer.

Sources said the triangulation of two data sets of value and capacity trail by way of GST and cess levy, respectively, will significantly reduce the scope for evasion in sectors such as pan masala and smokeless tobacco, which have historically been prone to under-reporting, valuation disputes, and clandestine production.

The GST on retail sale price will provide the value trail as to how much was sold, at what price. The Cess data will provide the capacity trail of how much could have been produced by the manufacturer.

"When these datasets are analysed together, supported by CCTV footage, surprise verification, chartered engineer-certified machine parameters, and risk-based analytics, the probability of tax leakage reduces drastically," sources said.

Explaining how the GST and cess regime together will help reduce evasion, sources said, if pan masala machines have the capability to produce a certain minimum number of pouches based on their rated speed and grammage, but the corresponding GST filings by the manufacturer declare only a fraction of that volume, the discrepancy would generate an immediate risk flag.

This dual-framework of value-based GST data and volume-potential-based cess data creates a systemic filter that reduces scope for under-reporting, invoice manipulation, and clandestine production -- problems that have historically plagued the pan masala and tobacco sectors, sources added.

"In effect, the combination of GST and the machine-capacity-based cess creates a comprehensive, mutually validating tax architecture that significantly enhances transparency, improves detection of anomalies, and protects the revenue base," they said.