The Group of Ministers (GoM) on GST rate rationalization has proposed increasing the Goods and Services Tax (GST) on sin goods—a category that includes aerated beverages, cigarettes, and tobacco products—from 28% to 35%. This proposed hike aims to bolster revenue generation, discourage the consumption of harmful products, and address public health concerns.
Objectives of the Proposed 35% GST Rate
- Public Health Advocacy:
- The higher tax rate targets demerit goods, known for their adverse health effects, such as cancer, diabetes, and obesity.
- By increasing prices, the government hopes to reduce consumption, particularly among price-sensitive demographics.
- Revenue Generation:
- Sin goods exhibit inelastic demand, meaning consumers tend to purchase them despite price increases.
- The elevated GST rate ensures a stable revenue stream for the government, potentially reducing reliance on the compensation cess, which is set to expire in March 2026.
- Discouraging Harmful Consumption:
- Products like tobacco, pan masala, and carbonated drinks are often linked to lifestyle diseases.
- The government aims to use taxation as a deterrent, encouraging healthier choices and promoting sustainable living.
Fitment Committee Recommendations
In July 2023, the Fitment Committee recommended capping the Central GST (CGST) and State GST (SGST) rates for tobacco products, including cigarettes, bidis, and smokeless tobacco, at 20% each. This suggestion was forwarded to the GoM for further deliberation.
Current Tax Structure for Sin Goods
- Base GST Rate: 28%
- Compensation Cess: Ranges from 11% to 290%, depending on the product.
- Additional Cess Validity: Scheduled to end in March 2026.
GST Overview
The GST system follows a four-tier structure:
- 0%, 5%, 12%, 18%, and 28% tax slabs.
- Essential goods: Exempted or taxed at lower slabs.
- Luxury and demerit goods: Fall under the highest slab of 28%, often with an additional cess.
Implications of the Proposed 35% GST Rate
- Economic Impact:
- The increase could significantly boost government revenue due to the inelastic nature of sin goods.
- May alleviate states’ dependency on the compensation cess introduced post-GST rollout.
- Health and Lifestyle:
- Higher prices may discourage consumption, promoting healthier habits and reducing the prevalence of diseases linked to tobacco and sugary drinks.
- Future Tax Revisions:
- The success of this tax revision could lead to similar measures for other products with health or environmental impacts, such as:
- Plastic waste
- Junk food
- Vaping devices and e-cigarettes
- Electronic waste
- The success of this tax revision could lead to similar measures for other products with health or environmental impacts, such as:
Finance Minister’s Statement
The Finance Minister has clarified that discussions about the GoM’s recommendations are premature and speculative. Further deliberation and approval will be required before implementing any changes.
This proposed hike in the GST rate represents a dual approach, addressing both public health and fiscal goals. If implemented, it could set a precedent for using taxation as a tool for social reform while ensuring a stable revenue flow for the government.
