Cigarette and Tobacco Stocks ITC and Godfrey Philips in Focus as Government Considers Higher GST

According to a news report, the government is considering increasing the Goods and Services Tax (GST) on cigarettes and other tobacco products. This change could be implemented once the current compensation cess is phased out in March 2026. The move is aimed at ensuring tax revenues from tobacco products remain stable despite the removal of the cess.

Currently, cigarettes and other tobacco products attract a GST of 28%, along with additional levies, taking the total tax burden to 53%. However, discussions are underway to raise GST to 40%, which is the highest permissible slab, and introduce an excise duty on top of it.

Why the Government is Reviewing Tobacco Taxation

Tobacco products are classified as “sin goods” and are heavily taxed to discourage consumption. The World Health Organization (WHO) recommends a tax rate of 75%, whereas India currently imposes a 53% tax on cigarettes. Despite this, tobacco and tobacco products contribute significantly to government revenue. In 2022-23, they generated ₹72,788 crore in tax earnings.

A ministerial panel under the GST Council is reviewing various options for restructuring taxation on tobacco products. The panel is expected to submit recommendations before a final decision is made.

Possible Taxation Models Under Consideration

Several taxation options are being explored, including:

1. Raising GST to 40% and adding an excise duty to sustain government revenue.
2. Replacing the compensation cess with a health cess, though some states and central government officials have expressed reservations.
3. Linking the cess to the maximum retail price (MRP) instead of sales value, as suggested by the Group of Ministers (GoM) set up earlier to review tobacco taxation.
4. Merging the cess with the existing tax slab to streamline the tax structure.

The compensation cess on tobacco products currently stands at 5%, along with a specific levy ranging from ₹2,076 to ₹4,170 per 1,000 cigarettes, depending on their length, filter, and flavour. The GoM had previously recommended modifying the cess structure, but the proposal was referred to a fitment committee for further evaluation.

Impact on Cigarette and Tobacco Stocks

With the possibility of increased taxation, cigarette and tobacco stocks such as ITC Ltd and Godfrey Phillips India Ltd have come under investor focus. Any increase in tax rates could impact their profit margins and consumer pricing strategies. However, these companies have historically managed to pass on tax hikes to consumers without significantly affecting demand.

Final Decision Rests with the GST Council

The final decision on increasing GST or introducing an excise duty will be taken after the ministerial panel submits its recommendations. The government aims to balance public health concerns with revenue generation, ensuring that tax collections from tobacco products remain robust even after the compensation cess is phased out.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.