Shares of leading cigarette manufacturers, including ITC, VST Industries, and Godfrey Phillips, saw a decline of up to 4% on Thursday following a report by The Economic Times (ET). The report suggested that the government is considering an increase in the Goods and Services Tax (GST) on tobacco products once it phases out the compensation cess currently imposed on these items.
The potential tax hike has raised concerns among investors, as higher taxes could impact the profitability of tobacco companies by increasing costs for consumers and potentially affecting sales. The compensation cess, which was introduced to support states after the implementation of GST, is expected to be discontinued soon, prompting discussions on alternative revenue measures.
Following the news, selling pressure was observed in the stocks of major cigarette manufacturers, leading to a decline in their share prices during Thursday’s trading session.
Following the report about a possible GST hike on tobacco products, shares of major cigarette manufacturers experienced a decline during Thursday’s trading session. VST Industries saw its stock drop by 4%, reaching the day’s low of ₹287.20. Similarly, shares of Godfrey Phillips also fell by approximately 4%, while ITC slipped more than 2%, dipping below the ₹400 mark.
Currently, cigarettes and other tobacco products are subject to a 28% Goods and Services Tax (GST). In addition to this, they are also subject to a compensation cess and other levies, which significantly increase the overall tax burden. When combined, these indirect taxes amount to a total of approximately 53%, making tobacco one of the most heavily taxed sectors in India. The potential increase in GST, as speculated in the report, has sparked concerns among investors regarding the financial impact on tobacco companies.
According to a report by The Economic Times (ET), one of the proposals being considered by the government is to increase the Goods and Services Tax (GST) on tobacco products to the highest permissible rate of 40%. In addition to this, an extra excise duty may also be imposed to further maintain tax revenue from the sector.
The rationale behind this potential move is to prevent any decline in government revenue once the compensation cess on tobacco products is phased out. Currently, this cess is an additional charge levied over and above GST, and its discontinuation is scheduled for March 31, 2026.
Government officials, as cited in the report, have indicated that they do not intend to introduce a new cess to replace the compensation cess. Instead, they are exploring alternative taxation measures, such as higher GST rates and excise duties, to ensure that revenue collection from tobacco products remains stable even after the existing cess is removed.
In the financial year 2022-23 (FY23), the government collected a total of ₹72,788 crore in tax revenue from the tobacco sector. This includes taxes levied through the Goods and Services Tax (GST), excise duties, the compensation cess, and other applicable levies on tobacco products such as cigarettes, bidis, and chewing tobacco.
Tobacco remains one of the most heavily taxed industries in India, contributing significantly to the government’s overall tax revenue. The substantial earnings from this sector highlight its importance as a source of fiscal income, which policymakers take into account when considering potential changes to taxation policies on tobacco products.
According to an official cited in the report, one alternative being considered is the introduction of a health cess to replace the existing compensation cess on tobacco products. However, this proposal has met with resistance from certain state governments, which are not in favor of implementing a new cess.
Additionally, the central government itself is reportedly not inclined toward introducing a fresh cess to replace the compensation cess once it is phased out. Instead, policymakers are exploring other taxation mechanisms, such as adjusting the GST rate or imposing additional excise duties, to ensure that tax revenue from the tobacco sector remains steady after the cessation of the compensation cess.
The GST Council had previously set up a Group of Ministers (GoM) to review and suggest changes to the taxation structure on tobacco products. This GoM was led by Niranjan Pujari, who was serving as the Finance Minister of Odisha at the time.
As part of its recommendations, the GoM proposed a revision in the way the cess component of GST is calculated on tobacco products. Instead of being based on the sales value of the product, the GoM suggested that the cess be linked to the maximum retail price (MRP). This approach was aimed at ensuring a more structured and possibly higher tax collection from tobacco products.
However, after discussions, the proposal was not immediately implemented. The issue was referred back to the Fitment Committee, which assesses tax rate changes, as well as the GoM on rate rationalization, which is responsible for streamlining and optimizing GST rates across various sectors. These committees are expected to further evaluate the feasibility and potential impact of the suggested changes before any final decision is made.