The central government is expected to introduce legislation in Parliament’s upcoming winter session aimed at imposing a tax on tobacco and related products. This proposed tax may replace the existing GST compensation cess currently applied to these items.
The existing compensation cess, which operates alongside the 28% GST, is anticipated to remain in effect for at least three months. This allowance will enable the government to fulfill its loan repayment obligations to states for the losses they incurred during their transition to the GST system implemented eight years ago. Traditionally, Parliament’s winter session begins in late November or early December.
In a recent GST Council meeting, Union Finance Minister Nirmala Sitharaman announced that the current GST rates and compensation cess would persist on products such as pan masala, gutkha, cigarettes, and other tobacco goods, including zarda, unmanufactured tobacco, and bidi, until the loans are settled in full. Following this, these items will be subjected to a higher GST rate of 40%, negating the existing compensation cess.
An official source quoted by the Economic Times indicated that there may be an alternative levy introduced to replace the compensation cess while still keeping tax levels consistent on tobacco products. On tobacco, the GST part is settled at 40%, and we expect the compensation cess period to be over by this calendar year. So, there is time to weigh some options on the table. But a decision will be made in due course,” the source stated.
Currently, these products face a total indirect tax rate of 53%, which consists of a 28% GST rate, compensation cess, central excise duty, and national calamity contingent duty. The original deadline of October 31 for terminating the compensation cess was based on projected monthly collections of around Rs 10,000 crore.
However, with luxury cars, coal, and aerated drinks no longer subject to compensation cess as of September 22—when revised GST rates take effect—the monthly cess collections are expected to decline, ultimately prolonging the loan repayment period for the states.
