GST Impact: Compensation Cess Increased on Cigarettes, Smoking to Become Costlier

Cigarettes to cost more as GST Council hikes cess rates

The BSE Sensex and Nifty fell on Tuesday as shares of cigarette maker ITC plunged almost 15 per cent after the GST Council yesterday chose to hike compensation cess on cigarettes.

In May, the Council headed by Finance Minister Arun Jaitley had fixed the rate for the demerit goods - cigarettes - in the highest tax slab of 28 percent and a cess over and above the tax rate, which would ultimately go to the compensation kitty of the states.

"In respect of cigarettes, the Fitment Committee had recommended that in line with the weighted average Value-Added Tax rate (28.7%) the GST rate on cigarettes may be kept at 28%", the official statement said.

The new cess rate for non-filter and filter cigarettes of length not exceeding 65 mm would be 5 percent plus Rs 2,076 per thousand sticks.

Up to 65 mm length: The price will increase by Rs 0.485 per cigarette.

At 9:44 am, the stock of cigarettes-hotel (FMCG) major ITC was trading 11.65 percent or 37 points lower at Rs 287 on the BSE.

Jaitley said to correct this, the GST Council has raised the fixed cess by Rs 485 to 792 per thousand sticks. But this rate was lower than the pre-GST tax incidence and the choice before manufacturers was either to pass on the lower taxes to consumers by way of cutting rates or pocketing the windfall.

As of now, there are no plans to approach the GST Council or finance ministry in this regard, he added. The meeting of the Council was originally slated to happen on August 5.

Consumer prices will, however, not change as the increased tax incidence would only take away the windfall profits the manufacturers were earning. "We estimate a hit of Rs35-36 billion to ITC's profits on an annualised basis-akin to the worst-case scenario feared by us prior to the government firming up on a much-more rational tax-structure announced on May 18", said JM Financial in a note to its investors.

Asked if the tax rates on textiles would be reduced, Jaitley said the Council would consider all the suggestions. "We will analyse what people were paying earlier, the impact of GST, and whether input credit is being passed on to consumers", Sinha told reporters here. "This is an operational issue. let us see how to resolve this", he said.



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