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Informist, Tuesday, Sept. 9, 2025

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – The government will exercise its Constitutional powers and choose from the options such as a hike in excise duty or the National Calamity Contingent Duty in order to maintain the tax incidence on tobacco products once the goods and services tax compensation cess levy is discontinued, Central Board of Indirect Taxes and Customs Chairman Sanjay Agarwal said. "Currently on tobacco products, central excise duty and NCCD is levied though at a very low rate...yes, that could be one of the options," Agarwal told Informist in an interview.

 

Agarwal, however, added that no final decision has been made on the additional levy so far. "Only thing which is clear in our mind is that tax incidence on sin goods, which is tobacco products and pan masala, will not come down when this compensation cess will get phased out," he said. 

 

Tobacco products like cigarettes already attract excise duty, calamity contingent duty, and compensation cess with varying rates depending on the length of the cigarette or filter present, flavouring, among other specifications. For instance, on every thousand sticks of cigarettes up to 65 millimetres in length, the excise duty amounts to INR 5, while the calamity contingent duty is INR 230, and the compensation cess is 5% plus INR 2,076. The combined taxation on tobacco products in India is currently in the range of 53%-88%, depending on the type of product.

 

Agarwal said states will have no say in deciding the additional levy as it will be out of the purview of the GST Council. "And already GST Council has made a recommendation that on sin goods, the rate applicable will be 40%, which is the maximum rate that can be levied on any good," Agarwal said, adding that the finance ministry will be solely taking the call on the additional levy. The ministry will likely firm up the plan by next few weeks, he said. 

 

In a landmark meeting on Wednesday, the GST Council decided to overhaul the rate structure by tweaking the four-slab GST framework of 5%, 12%, 18%, and 28% to a two-slab structure of 5% and 18%. The Council also introduced a new GST rate of 40% that will be imposed on sin and luxury goods and will effectively subsume the GST compensation cess that many of the items in the 28% GST bracket attracted. All new rates, except for those on tobacco products, will come into effect Sept. 22. 

 

While the treatment of all other luxury goods will be uniform and fairly simple with GST changes taking effect, tobacco products will have a different tax structure. Finance Minister Nirmala Sitharaman said that the GST council decided to continue with the compensation cess levy on only tobacco products beyond Sept. 22 till the time the loans taken to compensate states are repaid. According to the finance minister, the cess will be discontinued "well within this calendar year".

 

The GST compensation cess was introduced to bring states on board to adopt the GST regime in 2017. The Centre had promised to protect 14% revenue growth for states for the first five years by levying a compensation cess on certain luxury goods, including motor vehicles, expensive motorcycles, caffeinated beverages, and sin goods such as tobacco items and pan masala. Initially set to expire in June 2022, the cess was extended until March 2026 to repay INR 2.69 trillion in loans taken by the Centre to partly bridge the revenue shortfall of states during the COVID-19 pandemic.

 

The overall GST rate rejig is expected to boost consumption which will eventually drive robust GST collections. "This month or next month revenue will not be giving us true picture of how it is going to come," Agarwal said, considering clearing old stocks from supply chains may take a bit of time. "Maybe the last quarter of this financial year will give us a true picture on what will be our GST collections," the chairman said. 

 

So far in 2025-26 (Apr-Mar), monthly GST collections have averaged around INR 2 trillion. 

 

CUSTOMS CUTS

One of the key takeaways of Sitharaman's budget speech for FY26 was the rationalisation of customs tariff structure by reducing the number of tariff rates to eight, including the zero rate, from 15 earlier. However, to prevent any adverse shock to the industry from the sudden cut in customs duty, the government had hiked Agriculture Infrastructure and Development Cess to maintain tax incidence. 

 

According to Agarwal, now that the industry had adequate time to adjust to the revised duties, the government will look into rationalising this levy by either bringing it down or by phasing it out. "We did the rationalisation exercise for Basic Customs Duty and whatever additional incidence was there, was parked under AIDC," he said. "So now, this AIDC needs to be slowly brought down or phased out," he added. 

 

In order to do so, the indirect tax department will hold "extensive stakeholder consultation" soon, the chairman said. 

 

Beyond lowering the Agriculture Infrastructure and Development Cess, he also said that the government still has the scope to rationalise the customs structure further. As per the new customs structure announced in the Budget for FY26, there are zero, 2.5%, 5%, 7.5%, 10%, 15%, 20%, and 70% slabs. The chairman said that among the current eight slabs, it would be feasible for the government to look into reducing the highest slab of 70% in the future.

 

Agarwal also said that lowering customs duty on precious metals, including gold, had a direct bearing on smuggling. In the full Budget for FY25, Sitharaman had cut the basic customs duty on gold to 6%. Since the duty cut, seizures by the Directorate of Revenue Intelligence of smuggled gold has gone down by around 75% , Agarwal said.  End

 

Edited by Vandana Hingorani

 

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