Higher tax for tobacco: Centre mulls new bill for Parliament's winter session; compensation cess stays for now

The central government is likely to propose legislation during Parliament's winter session to implement a tax on tobacco and related products, potentially replacing the existing GST compensation cess levied on these items.

The present compensation cess, applied alongside the 28% GST, is expected to remain for a minimum of three months, allowing the government to complete its loan repayment to states for losses incurred during their transition to the GST system eight years prior.

Parliament's winter session traditionally commences in late November or early December.

During Wednesday's GST Council meeting, Union Finance Minister Nirmala Sitharaman announced that current GST rates and compensation cess would continue on pan masala, gutkha, cigarettes and tobacco products like zarda, unmanufactured tobacco and bidi until loans are fully settled. Subsequently, these items will face a higher 40% GST rate, whilst eliminating the compensation cess.

An official source, cited by Economic Times suggested that the compensation cess might be substituted with an alternative levy to maintain current tax levels on these 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," another source stated.

These products currently face a 28% GST rate plus compensation cess, central excise duty and national calamity contingent duty, amounting to 53% total indirect tax. The initial October 31 deadline for ending compensation cess was based on estimated monthly collections of approximately Rs 10,000 crore.

With luxury cars, coal and aerated drinks no longer subject to compensation cess from September 22, when revised GST rates take effect, monthly cess collections will decrease, extending the loan repayment period.