GST Council increases cess on cigarettes; blow to manufacturers

Indian labourers use a combination of chewing tobacco and tendu leaves to make handrolled 'beedi' cigarettes at a workshop in Nizamabad. India has raised the total tax on cigarettes by as much as 792 rupees per 1,000 cigarettes.- AFP pic

Clearing the air regarding the final Goods and Services Tax (GST) rate levied on cigarettes, Finance Minister Arun Jaitley on Monday reiterated that the earlier proposed figure of 28 percent will remain and so will the five percent ad valorem, as part of the compensation cess, effective midnight.

Hence, it made a decision to increase the compensation cess on all cigarettes.

The GST Council has recommended raising the compensation cess on cigarettes.

ITC shares fell almost 3 percent intraday Monday on fears of likely increase in cess on cigarettes.

Earlier there were reports that the Union Government may hike cess on cigarettes if prices fell after GST implementation.

The cess was made up of 5 per cent ad valorem rate and a fixed per thousand stick rate based on length of cigarettes.

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Finance minister Arun Jaitley said that the 28% GST rate on cigarettes and the 5% ad valorem on cess will stay. Now only GST and cess are levied on these products.

Jaitley said while any reduction in tax incidence of items of mass consumption would be welcome, the same would be unacceptable in the case of demerit goods like cigarettes.

"There were two things that the cigarette companies could do - either reduce the price of cigarette, which because of the health consequences of cigarettes is not a very desirable thing". After 15 days, it was indicated that the impact of cascading effect was not factored adequately, which resulted in windfall profit for companies, which they eventually transferred to the balance sheet. "This was not the intention of the Council", he said.

The GST Council had in May fixed 28 per cent as the top rate for cigarettes.

Up to 65 mm length: The price will increase by Rs 0.485 per cigarette.

Over 65 mm but less than 70 mm: The price will increase by Rs 0.792 per cigarette.

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