Cigarettes and Soft Drinks May Become Costlier With 35% GST, Final Call On Dec 21

In a significant move aimed at adjusting the Goods and Services Tax (GST) structure, the of Ministers (GoM) tasked with GST rate rationalisation has proposed a sharp increase in the tax on items deemed harmful, such as cigarettes, tobacco products, and aerated beverages. The proposed hike sees an increase from the current rate of 28% to a new rate of 35%. This decision is set to be a major talking point in the upcoming GST Council meeting, chaired by the Union Finance Minister, along with her state counterparts, scheduled for December 21. The council will deliberate on these recommendations, which could lead to final decisions on GST rate adjustments.

The GoM, led by Bihar Deputy Chief Minister Samrat Chaudhary, has been closely scrutinizing the tax rates on various goods, leading to the proposed adjustments. Notably, the proposed rate changes extend beyond sin goods. For example, the tax structure for apparel will also see modifications. Readymade garments priced at or below Rs 1,500 will attract a 5% GST, those between Rs 1,500 and Rs 10,000 will be taxed at 18%, and garments exceeding Rs 10,000 will face a 28% tax. The GoM's rationale behind these adjustments is to streamline the tax structure and address revenue implications effectively.

Understanding the Rate Rationalisation

The current GST framework is designed with four distinct tax slabs: 5%, 12%, 18%, and 28%. Essential goods are either exempted or fall within the lowest tax bracket to make them more affordable for the general populace. On the other hand, luxury and sin goods, which include high-end items and products detrimental to health, are taxed at the highest rate. Additionally, luxury and demerit goods are subject to a cess over the standard 28% slab, aimed at further discouraging their consumption while boosting government revenue.

The proposed changes by the GoM are extensive, affecting 148 items within the tax brackets. These adjustments are part of a broader effort to optimize the GST collection and ensure that the tax rates reflect the current economic and social priorities. The official report detailing these recommendations emphasizes the potential positive impact on revenue, highlighting the strategic importance of these rate modifications.

Implications of the Proposed Adjustments

The decision to elevate the tax on sin goods to 35% represents a significant shift in the government's approach to managing the consumption of products with negative health implications. "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," stated an official. This move is in line with the government's ongoing efforts to enhance public health measures while also securing an avenue for increased revenue collection.

The GoM's recommendations extend beyond just rate hikes for certain goods. In its previous meeting in October, the panel suggested reducing the GST on packaged drinking water of 20 litres and above from 18% to 5%, and on bicycles costing less than Rs 10,000 to 5% from 12%. Additionally, they proposed lowering the GST on exercise notebooks to 5% from 12%, and increasing the GST on shoes and wristwatches priced above certain thresholds. These recommendations reflect a nuanced approach to tax rate adjustments, balancing between encouraging healthier lifestyle choices and managing economic considerations.

As the GST Council convenes to review these proposals, the potential for further rate rationalisation will be a key focus. The council may decide to continue the GoM's mandate, allowing for ongoing adjustments to the GST structure. This iterative process aims to ensure that the GST rates remain aligned with evolving economic conditions and policy objectives.