Why tobacco, cigarettes, aerated drinks are likely to become costlier in India

The Group of Ministers (GoM) on GST rate rationalisation has recommended raising the tax on products like aerated beverages, cigarettes, and other tobacco-related items to 35%, an increase from the current 28%.

This is set to be the first major restructuring of tax rates under the Goods and Services Tax (GST) since its implementation seven years ago.

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Amid these reports, shares of several cigarette companies, including ITC, Godfrey Phillips, and VST Industries (maker of Charminar), dropped by as much as 3% on Tuesday.

Why cigarettes, aerated beverages could become costlier

The GoM, led by Bihar Deputy Chief Minister Samrat Choudhary, held a meeting on Monday to finalise proposed rate adjustments, including a hike on “sin goods” such as cigarettes and aerated beverages. Alongside this, changes to GST structures for apparel and other items were also discussed, PTI reported.

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The GoM will propose tax rate changes for 148 items to the GST Council. An official said, “The net revenue impact will be positive.”

The group’s recommendations will be reviewed by the GST Council, chaired by Union Finance Minister Nirmala Sitharaman, on December 21, with the final decision on GST rate changes to be made then.

“The GoM has agreed to propose a special rate of 35 per cent on tobacco and related products and aerated beverages. The four-tier tax slab of 5, 12, 18, and 28 per cent will continue and a new rate of 35 per cent is proposed by the GoM,” the official told the news agency.

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Currently, cigarettes are taxed at 28% GST, in addition to a compensation cess ranging from 5% to 36%, depending on the length of the cigarette, with the longest cigarettes drawing the highest cess of 36%.

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“The four-tier tax slabs of 5%, 12%, 18%, and 28% will remain, with the introduction of a new rate of 35% proposed by the GoM," an official told the news agency.

Under the GST rules, essential goods are either exempt or placed in the lowest tax category, while luxury and harmful products are taxed at higher rates. Items like cars and washing machines, considered luxury goods, and products like tobacco and aerated beverages, considered harmful, face an additional cess on top of the standard 28% tax rate.

Speaking to The Indian Express, a state finance minister, who is part of the GoM, said, “The GoM has proposed raising the rates for tobacco and related products, and aerated beverages to 35%. It will be a special rate and will help minimise the revenue loss impact from other rate changes.”

Notably, the GoM’s recommendations are intended to help the council in determining whether further adjustments to tax rates are needed. The council may also consider extending the GoM’s role to include periodic reviews of GST rates, India Today reported.

As a result of the reports, Varun Beverages, one of PepsiCo’s largest bottling partners, saw its shares fall by up to 5.2% to Rs 600 on the BSE, Economic Times reported. The company generates a significant portion of its revenue from India’s aerated beverage market, which has been facing difficulties in achieving its full growth potential, partly due to high GST rates.

Despite this, Varun Beverages’ shares have increased by 2.6% over the past month and 9% over the past six months, the media outlet reported.

A report by the economic think tank ICRIER in October revealed that the carbonated soft drinks (CSD) sector in India has struggled to scale due to obstacles such as high taxation under the GST framework.

According to data compiled by the World Bank, India has one of the highest tax rates on sugar-sweetened beverages (SSBs), with a total tax rate of 40% for carbonated soft drinks as of 2023.

Revision in GST rates for readymade garments?

The Group of Ministers has also recommended changes to GST rates on ready-made garments. According to the proposal, garments priced up to Rs 1,500 would be taxed at 5%, while those priced between Rs 1,500 and Rs 10,000 would face an 18% rate. Garments costing over Rs 10,000 would attract a 28% GST, PTI said in a report.

The GoM has also suggested increasing the rates for luxury items such as cosmetics, watches, and shoes, IE reported. This shift in the tax structure would result in a system where taxation is more closely aligned with the price of the product, meaning higher taxes on luxury and premium items.

The GST Council is set to meet in Jaisalmer on December 21, where it will discuss several proposals, including the taxation of life and health insurance premiums. It is expected that health insurance premiums paid by senior citizens and term life insurance premiums will be exempted. Further, for other citizens, health insurance coverage up to Rs 5 lakh may be exempt from GST, while premiums for coverage over Rs 5 lakh would continue to be taxed at the current rate of 18%, the report said.

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Previous GoM recommendations

In its previous meeting held in October, the Group of Ministers proposed several adjustments to the GST rates, including reducing the tax rate on packaged drinking water (20 litres and above) from 18% to 5%. Similarly, GST on bicycles priced under Rs 10,000 was recommended to be cut from 12% to 5%, while the rate on exercise notebooks was also proposed to drop from 12% to 5%.

Meanwhile, the GoM recommended an increase in the GST for higher-end products. Specifically, the tax on shoes priced above Rs 15,000 per pair and wristwatches exceeding Rs 25,000 was proposed to rise from 18% to 28%.

With inputs from agencies