The Group of Ministers (GoM) formed by the GST Council has reportedly suggested introducing a “special rate” of 35% for tobacco and aerated beverages.
That said, Finance Minister Nirmala Sitharaman has called reports of recommendations by the GoM premature and speculative and said that the GST Council will make the final decision; the GoM is only a recommendatory body.
At present, most tobacco products fall under the 28% GST slab, with the exception of tobacco leaves, which are taxed at 5% under the reverse charge mechanism.
The GoM has also proposed to tweak GST on at least 148 items. They have recommended increasing the tax on high-end readymade garments, cosmetics, watches, shoes among others.
However, here’s a caveat: these are only proposals and the final decision will be taken by the GST council when it meets December 21.
Mani highlighted the risk that a 35% tax rate on tobacco could lead to other products being added to the higher rate category in the future, potentially distorting the overall GST structure.
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He reflected on the evolution of GST, mentioning that many have been anticipating a three-slab structure since its introduction. He pointed out that when the 28% rate was first introduced, it was intended for “sin goods,” such as cigarettes, pan masala, and tobacco products. Over time, however, this category has expanded to include automobiles, dishwashers, air conditioners, and even cement.
Mani expressed concern that if this trend continues, businesses could face significant uncertainty, as the movement of goods between tax slabs could occur unpredictably throughout the year, complicating long-term planning.
Mani also questioned the practical impact of these changes on consumption, particularly in premium segments like tobacco, where demand is relatively price inelastic.
A 10% price increase between the 18% and 28% tax rates may not deter consumers in that bracket. However, he raised concerns about the broader implications for the GST system, which was originally designed to simplify indirect taxes.
Mani warned that introducing price-based categories for different product groups, starting with apparel and potentially extending to durables and other goods, could trigger a cascade of complications.
While a price-based system might work for essential items in the 5% tax category, he cautioned that applying it to products in the 18% or 28% categories could lead to an unwarranted proliferation of products.
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