Paper: GS – III, Subject: Economy, Topic: Taxation, Issue: Tobacco Taxation.
Context:
The Union government has announced a major rejig of tobacco taxation, effective February 1, raising excise duties and GST rates on cigarettes and other tobacco products. Cigarette prices are expected to rise by 15 – 40%, while the GST compensation cess will be withdrawn.
Key Takeaways:
Key Changes in Taxation Regime:
- End of GST Compensation Cess: The cess, which had made excise duty on cigarettes nominal (a fraction of a paisa per stick), ceases from February 1. This shifts reliance to higher excise and GST rates.
- New Excise Duties: Specified under the Central Excise (Amendment) Act, 2025, these apply to tobacco products, with cigarettes seeing a significant effective increase.
- Cess on Pan Masala: Provisions of the Health Security and National Security Act, 2025, activate from February 1, imposing a new cess on pan masala units to deter use.
| GST Compensation Cess Background: About GST Compensation Cess: It is levied under Section 8 of The Goods and Services Tax (Compensation to State) Act, 2017. Why is GST Cess Levied? As GST is a consumption-based tax, the state in which the consumption of goods and supply happen would be eligible for the indirect tax revenue. Hence, after GST comes into effect, some states that are net exporters of goods and/or services are expected to experience a decrease in indirect tax revenue. During the COVID-19 pandemic years (2020-21 and 2021-22), the cess collections fell short of the compensation requirements, leading the Centre to borrow funds to compensate the states. The compensation cess on tobacco products will be discontinued once the government repays the interest on these loans. |
Expected Impact:
Public Health:
- Reduced smoking initiation and consumption.
- Lower burden of tobacco-related diseases (cancer, COPD, cardiovascular diseases).
- Long-term healthcare cost savings.
Economic & Industry:
- Cigarette prices likely to rise 15–40%, depending on product category.
- Short-term industry pushback, but limited long-term revenue loss.
- Risk of illicit trade if enforcement is weak.
Equity Concerns:
- Beedi taxation remains lower despite high health risks.
- Informal sector workers in beedi manufacturing may face livelihood pressures.
Challenges & Risks:
- Possibility of tax evasion and smuggling.
- Lower taxation on beedis may shift consumption patterns rather than reduce overall tobacco use.
- Need for stronger coordination between GST Council, CBIC, and States.
Way Forward:
- Gradually move towards uniform, health-aligned tobacco taxation.
- Strengthen enforcement against illicit tobacco trade.
- Allocate a portion of additional revenue to public health and cessation programmes.
- Support livelihood diversification for workers in the beedi sector.
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