GST Council raises cess on cigarettes to fix anomaly under GST

The goods and services tax (GST) Council raised the cess on cigarettes Monday to address an anomaly under the new regime that had resulted in lower tax incidence than before. The move will raise the prices of cigarettes that had fallen under the GST regime, which rolled out July 1. 

Cigarette maker ITC had been the biggest gainer from the anomaly with its stock rising nearly 10% from end-June levels, more than double the rise in the broader market over this period. An ITC spokesperson said the company was studying the details of the move. The increase in cess ranges from `485 per 1,000 sticks for filter cigarettes of up to 65 mm length to `792 per 1,000 sticks for those of 70-75 mm. In the case of other filter cigarettes, the tariff will rise by 31%. The new rates took effect at midnight. 

Finance minister Arun Jaitley said the anomaly would have cost the government Rs 5,000 crore in tax and benefited companies in the sector. 

"GST Council meeting was called after an anomaly was detected in the compensation cess on cigarretes. Impact of the cascading was not factored in, which resulted in windfall gains for cigarette companies... This was not the intention of the GST Council," Jaitley said, adding that the council reviewed the cess on cigarettes and decided to increase it. The council met via videoconference. 

TAX ANOMALY 

The weighted average value added tax (VAT) rate on cigarettes was 28.7% and in line with that, GST was kept at 28%. In addition, compensation cess was to be levied at 1.05 times the specific rate, or 5% extra, the specific excuse duty rates. 

"However, this method of calibrating the compensation cess did not take into consideration 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," the finance ministry said in a statement. "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." 

Source: The Hindu

The tax rate of 28% and ad valorem cess of 5% remains the same except in the case of other items falling in the cigarette category. 

Source: Economic Times