Higher Tax Load On Tobacco Products Posing Dual Challenges

It’s a choice between devil and the deep blue sea! Consumption of cigarette and other tobacco products causes increasing health hazards. One easy way of cutting it down is to impose increasing tax burden on cigarettes and other tobacco burdens. But if the government puts additional tax or Cess burden that affects the profitability of the tobacco companies.

If GST is finally increased to 40 per cent (highest permissible slab) and additional excise duties are raised on tobacco products, that could raise the burden on profitability of tobacco companies if the effective burden increases from the current rates. That’s what the experts feel.

India is considering raising the GST on cigarettes and tobacco products to 40 per cent and adding an additional excise duty after compensation Cess ends in 2026. Currently, these products face a 28 per cent GST plus other levies totaling 53 per cent, much below WHO’s recommended 75 per cent. The primary objective of this consideration is to ensure that tax revenue from tobacco products remains stable after the compensation Cess concludes in March 2026. The consideration of tax hike by the government presents dual challenges. Companies may face margin pressures along with demand contraction if the tax rates are set higher as it could further intensify the competition from unorganised markets.

The move by the Centre could be focused towards social welfare and tax maximization, but will hamper the investment appeal of the companies and expected returns for shareholders. The idea is to ensure that the tax revenue on these products does not fall once levying of the compensation Cess ends, now scheduled for March 31, 2026. The government is not keen to replace the compensation Cess with another Cess, government officials said.

Interestingly, notwothstanding the ill effect the tobacco products have on the human body, the tobacco industry is booming, WHO has released many reports claiming that India is harbouring the world’s highest incidence of mouth cancer. India is the second largest consumer of tobacco, having an astonishing 275 million users!

At present, the tobacco industry attracts Central Excise duty, National Calamity Contingent Duty (NCCD), GST, and compensation Cess as it is a sin good. In fact, a lot of revenue is generated from the sale of tobacco for the Indian government. However, the tax burden levied on the Indian tobacco industry is not enough, as per the recommendation of the WHO for a minimum tax burden of 75 per cent on all tobacco-related products.

Hence, there had been an increasing demand for a higher tax burden on tobacco manufacturers. The Indian government has constantly been increasing the rate of taxes imposed on cigarettes and tobacco products. In line with this, in Budget 2023, it had been proposed that the NCCD rate be revised upwards by 16 per cent, considering everything, extremely cautious and well calculated moves are required.