Tobacco prices set to rise 5–6% as GST council clears 40% slab

There is likely to be a mid-single digit increase in net taxation impact on tobacco products such as cigarettes and pan masala once the new GST rate for these products comes into effect along with a change in the tax computation method, industry executives said. This is likely by the calendar year-end or early next year, and till then there will be no change in taxation and consumer prices.

However, companies will then pass on the tax increase to the consumers which is likely to push up prices by 5-6%, industry executives said.

The GST Council on Wednesday increased the GST on cigarettes, cigars, pan masala, gutka, chewing tobacco like zarda and smoking pipes from 28% to 40%. However, this will not be implemented from September 22 when the new rates are put into effect.


At present, apart from 28% GST on cigarettes there is compensation cess of 5%, national calamity contingent duty (NCCD) and excise duty – the last two rates dependent on the cigarette stick size. With these, the net tax impact is around 38% to 42%.

The GST Council said the existing tax rates and calculation method will continue till the loan and interest payment obligations under the compensation cess account are completely discharged. Finance minister Nirmala Sitharaman said in a press conference on Wednesday that the loan and interest payment obligations should be over by the end of this calendar year.

The tax and price increase will be magnified due to the change in tax computation method on tobacco products -- GST will now be levied on retail sale price printed on the pack instead of transaction value or actual price paid.

An industry executive said at present many manufacturers under-report transaction values to reduce their tax liability. Also, cigarettes are mostly sold at less than the pack price in several stores.

However, the GST Council reduced the GST rate on bidis from 28% to 18%. Also, there will be no change in tax computation method, whereby the price of bidis will drop by 8-9%. This may impact sales of entry-level small size cigarettes which accounts for the bulk of the industry volumes, an executive said.