GST rates:35% GST slab may be imposed on these products; here's what we know

The GST rate adjustment is a crucial step in enhancing the overall GST framework, boosting revenue, and addressing public health concerns.

GST rates:?The Group of Ministers (GoM) on GST rate rationalization has put forth a proposal to increase the tax rate on sin goods, such as aerated beverages, cigarettes, tobacco, and related products, from 28% to 35%. This proposal has sparked a significant amount of debate. The adjustment is seen as a crucial step in enhancing the overall GST framework, boosting revenue, and addressing public health concerns.

The suggestion to introduce a 35% GST rate on tobacco, tobacco products, and aerated drinks is primarily aimed at promoting public health and increasing government revenue. These items are classified as demerit products due to their adverse effects on health.

The 35% rate falls within the higher bracket of GST, aligning with the government's objective of discouraging the consumption of such products. Furthermore, it seeks to generate more revenue from goods that typically exhibit inelastic demand, implying that consumption may not decrease significantly even with higher prices.

How much tax have to pay?

In mid-July, the Fitment Committee recommended that the issue be passed on to the GoM for further consideration. The committee suggested establishing a maximum tax rate of 20% for tobacco products, such as cigarettes, bidis, and smokeless tobacco, under the Central GST (CGST) and State GST (SGST) Acts.

Goods classified as sin goods under GST are those deemed harmful or undesirable, typically taxed to discourage their consumption or to increase revenue. This category includes cigarettes, various tobacco products, carbonated beverages, luxury cars, and pan masala.

Currently, these goods are subject to a 28% GST rate, along with an additional compensation cess ranging from 11% to 290%, which is set to expire in March 2026.

The Finance Minister has made it clear that any reports on recommendations by the GoM regarding rate rationalisation are premature and speculative.

GST rates

The GST rates vary from 0% to 28%. Changes have been made to the rates for different products by the GST Council multiple times since its implementation. Presently, the GST follows a four-tier structure with tax slabs of 5%, 12%, 18%, and 28%. Essential items are either exempt from tax or subjected to the lower slab, whereas luxury and demerit goods fall under the highest slab.

The GST Council advises the Union and state governments on various GST-related matters, such as determining which goods and services should be included or excluded from GST, setting special rates to generate extra revenue during natural disasters, and creating specific provisions for certain states.

During the Covid-19 pandemic, the GST Council endorsed reducing duties on specific Covid-related goods.

The council ensures that necessary items for the public remain in lower tax slabs to avoid increased costs. Additionally, an extra cess is applied to certain goods on top of the standard tax rate. For instance, products like cigarettes and aerated drinks, which fall under the highest 28 per cent tax slab, are subjected to an extra 15 per cent cess.

35% GST for tobacco, aerated drinks

The hike in the GST rate for tobacco and aerated drinks serves both as a fiscal measure and a public health initiative. These products are major contributors to lifestyle diseases such as cancers, diabetes, and obesity. Through increased taxation, the government aims to curb their consumption, particularly among price-sensitive consumers, and encourage healthier choices.

On a financial level, the increased tax rate is predicted to generate substantial revenue, given the relatively inelastic demand for these goods. Inelastic demand implies that consumers will continue buying these products even at higher prices, guaranteeing a stable income source for the government. This move could potentially lessen the need for compensation cess, initially introduced to offset states' revenue declines post-GST implementation.

In the same league

Implementing the 35% tax rate may prompt the government to consider applying similar tax hikes to other industries with comparable health or environmental effects, such as plastics, junk food, electronic waste, vaping, and e-cigarettes. The government must provide clarification on whether additional sectors will be affected by the new tax rate in the future.

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