India could consider raising the Goods and Services Tax (GST) on cigarettes and other tobacco products once the compensation cess on these items is discontinued, the Economic Times reported.

Currently, cigarettes and tobacco products attract a 28 percent GST, in addition to a compensation cess and other levies, taking the total indirect tax burden to 53 percent. According to the report, one proposal under discussion is to raise the GST rate to the highest permissible 40 percent and supplement it with an additional excise duty.

A ministerial panel under the GST Council, tasked with reviewing the future of the compensation cess beyond 2026, is expected to deliberate on these options before submitting its report. The final decision will rest with the GST Council.

“Cess is not considered efficient,” an official was quoted as saying, adding that all possible alternatives will be examined.

Tobacco products, categorized as ‘sin goods,’ are currently subject to multiple levies, including GST, basic excise duty, the compensation cess, and the National Calamity Contingent Duty. Despite the existing taxation reaching 53 percent, it remains below the 75 percent rate recommended by the World Health Organization (WHO).

Tobacco and related products, including cigarettes and pan masala, are a major source of tax revenue for the government, contributing Rs 72,788 crore in 2022-23, ET reported.

An alternative proposal under discussion is introducing a ‘health cess’ to replace the compensation cess, though some states have expressed reservations. “The Centre is also, in principle, not in favor of bringing a new cess,” an official told ET.

The compensation cess on tobacco products currently includes a 5 percent levy on cigars and cigarettes, along with an additional charge ranging from Rs 2,076 to Rs 4,170 per thousand units, depending on length, filter type, and flavor.

A Group of Ministers (GoM) on tobacco taxation, previously led by former Odisha Finance Minister Niranjan Pujari, had recommended linking the cess component of GST to a product’s maximum retail price rather than its sales value.

The issue was later referred to a fitment committee and the GoM on rate rationalization. Additionally, the GST Council directed the GoM on compensation cess to evaluate the possibility of either merging the cess with existing tax slabs or introducing an alternative levy.

Source: Money Control