The GST Council on Monday decided to hike the cess on cigarettes to nullify the "windfall" that manufacturers were reaping due to an anomaly in the GST rate fixation, finance minister Arun Jaitley said.
''The GST Council in its 19 meeting held on Monday reviewed the compensation cess rates on cigarettes and recommended an increase in the same with effect from 18 July 2017, ie, the intervening midnight of 17/18 July 2017,'' a finance ministry release stated.
The increase in the compensation cess rate will bring the total tax incidence on cigarettes in GST regime at par with the total tax incidence in pre-GST regime, raking in Rs5,000 crore in revenues, according to the finance ministry.
While the peak goods and service tax (GST) rate of 28 per cent and the 5 per cent ad valorem on it stays, the compensation cess has been hiked between Rs485 and Rs792 per thousand sticks.
The compensation rate on cigarettes will go up by a uniform 31 per cent taking the additional levy on cigarettes to 36 per cent.
The increase in cess would bring in Rs5,000 crore of additional tax revenue, which otherwise would have gone to the manufacturers, he said briefing reporters after the council held an emergency meeting through video conferencing.
''While any reduction in tax incidence on items of mass consumption would be welcome, the same would be unacceptable in case of demerit goods like cigarettes,'' the finance ministry noted.
The GST Council had in May fixed 28 per cent as the top rate for cigarettes. A 5 per cent ad valorem cess was levied on top of it and Rs1,591 per thousand sticks as fixed cess on both filter and non-filter cigarettes of not exceeding 65 mm length. The cess rate varied from Rs2,126 to Rs4,170 for cigarettes of different lengths.
This rate, however, added up to less than the pre-GST tax incidence and the manufacturers had the choice of either passing on the lower taxes to consumers by cutting prices or pocketing the windfall.
The manufacturers chose the latter. Jaitley said to correct this, the GST Council has raised the fixed cess by Rs485 to 792 per thousand sticks. Consumer prices will, however, not change as the increased tax incidence would only take away the windfall profits the manufacturers were earning.
''In respect of cigarettes, the fitment committee had recommended that in line with the weighted average VAT rate (28.7 per cent), the GST rate on cigarettes may be kept at 28 per cent. In addition, compensation cess may be levied on cigarettes at rates equal to 1.05 times the specific excise duty rates (net of NCCD). However, this method of calibrating the compensation cess did not take into consideration the cascading of taxes (that is in earlier regime VAT being charged on value inclusive of the excise duty). As a result, the total tax incidence on cigarettes in GST regime has come down, as compared to the total tax in pre-GST regime.
''While any reduction in tax incidence on items of mass consumption would be welcome, the same would be unacceptable in case of demerit goods like cigarettes,'' the finance ministry said.
The GST Council will meet in first week of August to review the progress of the implementation of GST, which was rolled out on 1 July.