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GST Cess Amendment: we see no impact on cigarette taxation

A few questions are being raised whether the amendment to the GST Compensation Cess Schedule passed by the Lok Sabha late last week is a prelude to a possible government action on cigarette taxation, which has been fairly steady and reasonable over the last few years. A stable tax regime alongside enforcement diligence have led to early signs of volume recovery from illicit trade (c.20% of the market now). Illegal products are available at prices that are even lower than the minimum tax to be paid on a legal product. Our analysis of what have transpired in the GST Council over the last couple of meetings suggests that the amendment is more a move to cast the tax net wider on non-cigarettes forms of tobacco (specifically gutkha, pan masala, chewing tobacco etc), and it is likely that cigarette tax structures are left untouched given that compliance therein is pretty robust already. We continue to expect that the government’s increasingly logical stance on tobacco taxation remain a key value-driver for the ITC stock, and there is increasing evidence of the policy environment in recent years being quite supportive.

* New cap introduced for GST Compensation Cess on tobacco products: The maximum compensation cess chargeable on tobacco products is currently capped at a maximum of INR 4,170 per 1000 sticks plus 290% ad-valorem. To illustrate, the cess payable on a 84mm King-Sized Filter cigarette currently works out to c.INR 6.5 per stick (INR 4.17 plus 36% ad-valorem); for a 69mm Regular-Sized Filter cigarette, the same is c. INR 3 per stick (INR 2.747 plus 5% ad valorem). Base GST rate of 28% and excise duty (based on length of the cigarettes) are payable over and above the cess. What the Finance Bill 2023 Amendment effectively does is to introduce ‘100% of retail selling price’ as an alternate cap to the cess chargeable on tobacco products over and above the existing cap of ’INR 4.17 per stick plus 290% ad valorem’.

* Why the need for such an amendment at this stage? The GST Council in one of its recent meetings had approved the recommendation by a Group of Ministers to boost the firststage collection of revenue for products like pan masala, gutkha, chewing tobacco where there seems to have been some leakages in tax collections. Given that all forms of tobacco products (including cigarettes) fall under the same tariff heading, viz Chapter 24, an amendment needed to be made at an overall chapter level but notably, the government has retained the existing cap, viz. ‘INR 4,170 per 1000 sticks plus 290% advalorem’ and has simply added an alternate cap in the form of ‘100% of retail selling price’. We reckon that while some of the chewing tobacco, gutkha manufacturers were paying taxes (based on their ‘transaction value’ with distributors), players lower down the supply-chain were likely not paying their fair share of taxes and hence the decision to charge a tax based on retail selling prices at the source level, viz. the manufacturer itself.

* We do not expect this amendment to change the mode of cigarette cess levy: Given that the legal cigarette players are pretty much compliant on taxes, we do not expect the amendment to have any effect on the way cigarettes are taxed, especially since the existing cap has been retained, as discussed earlier. We believe the retail-price based levy is being introduced more specifically to boost first-stage tax collections from non-cigarette tobacco products since the ministerial panel (on whose recommendations this amendment is based) was formed to specially look at these products and not cigarettes

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