Government May Look to Hike Cess on Cigarettes If Prices Come Down

Cigarette manufacturing companies are yet to revise prices post the implementation of GST.

The government may consider hiking the compensation cess on cigarettes if prices come down following the implementation of the Goods and Services Tax (GST), a senior finance ministry official told BloombergQuint on condition of anonymity.

Under the newly implemented GST, cigarettes fall in the highest 28 percent bracket and attract an additional cess, depending on their length. However, the effective levy is about 8 percent lower than earlier, according to brokerages CLSA and ICICI Direct. This is mostly because the additional excise duty has been dropped under GST.

Cigarette manufacturing companies, however, are yet to revise prices post the implementation of GST.

The intention of the government is not to lower the prices of cigarettes, and we will increase the cess on cigarettes if prices come down, another senior finance ministry official told BloombergQuint, also requesting anonymity.

The central government has the power to levy central excise on tobacco products over and above the GST rate of 28 percent and a compensation cess. The cess varies according to the size of the cigarette.

If the price of cigarettes comes down, the government may not look at levying central excise duty, but may consider increasing the cess on the demerit good, the same official quoted above said. The official explained that if the government considers levying central excise duty, 42 percent of the taxes' share would go to states as per the 14th Finance Commission. Hence, increasing the compensation cess on cigarettes will be a better option, the same official quoted above said.

According to the 14th Finance Commission’s recommendations, the share of states in central taxes is 42 percent.

An email sent to the Finance Ministry and ITC Ltd on Friday remained unanswered.

(This story was first published on BloombergQuint and has been republished with permission.)

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