Introduction to GST Rate Adjustment
The Group of Ministers (GoM) on GST rate rationalization has proposed increasing the tax rate on sin goods, including aerated beverages, cigarettes, and tobacco products, from the existing 28% to 35%. This proposal, aimed at addressing public health concerns and boosting government revenue, has sparked widespread debate and discussions.
Objective of the Proposal
The proposed 35% GST rate targets products classified as demerit goods due to their adverse health impacts. By increasing the tax on items with inelastic demand, such as tobacco and aerated drinks, the government intends to discourage consumption while simultaneously generating additional revenue. These goods, which currently fall under the 28% GST slab, also attract a compensation cess ranging from 11% to 290%, set to expire in March 2026.
Recommendations and Considerations
In mid-July, the Fitment Committee suggested that the issue of increased taxation on tobacco products be referred to the GoM for further evaluation. They recommended setting a maximum tax rate of 20% under the Central GST (CGST) and State GST (SGST) Acts for tobacco-related items, such as cigarettes and bidis.
The current GST system has a four-tier structure with tax slabs of 5%, 12%, 18%, and 28%. Essential items are either exempt or taxed at lower rates, while luxury and demerit goods like tobacco, pan masala, and luxury cars fall under the highest slab. Sin goods are taxed to discourage consumption or generate revenue due to their harmful nature.
Official Statement and Speculation
Finance Minister Nirmala Sitharaman clarified that reports regarding GoM recommendations on GST rate rationalization are speculative and premature. However, the proposal remains under consideration as part of broader efforts to refine the GST framework.
