With the new GST mechanism for pan masala, cigarette and tobacco products coming into effect from February 1, the States will have a higher share of revenue, said sources. Also, GST incidence on these products will remain the same.
Following the enactment of the Health Security se National Security cess Act and the Central Excise (Amendment) Act, the Finance Ministry on Wednesday notified February 1 as the date for implementation of the new GST mechanism.
This means from the said date, pan masala will attract 40 per cent GST and cess, while cigarettes and various tobacco products will attract 40 per cent GST and additional levy under the Excise Act, along with National Calamity Contingent Duty (NCCD). As on date, these products attract GST of 28 per cent, along with a compensation cess. Now, from February 1, the compensation cess will cease.
Responding to the impact on State finances, sources said a combination of legitimate excise duty on tobacco, purpose specific cess on pan masala and increased GST rate on 40 per cent from 28 per cent will ensure that States receive more GST share than before.
DIVISIBLE TAX POOL
Excise duty is part of the divisible tax pool, and is devolved to the States as per the Finance Commission formula. Thus, “any increase in excise duty on tobacco directly increases the quantum of resources flowing to States, rather than reducing it”, said a source.
Further, he explained that the GST share of the States will be protected and not be reduced. When the GST compensation cess on cigarettes ended, a portion of that burden was absorbed within GST by increasing the GST rate on cigarettes and pan masala to 40 per cent from 28 per cent.
“This higher GST rate now flows through the regular GST channel, of which States receive approximately 70 per cent (SGST + IGST settlement). In effect, part of the compensation cess base has been moved to GST, enhancing the States’s share,” said the source.
It may be noted that Article 270 of the Constitution empowers Parliament to impose specific purpose cess, and that cannot be shared with the States.
The compensation cess was introduced through a special Act to bridge the revenue shortfall for States post the introduction of GST.
Though it was only for the first five years, it was extended to repay back-to-back loans taken during pandemic to compensate States, through revenue collection through cess was not to be given to the States.
Now, as the loan repayment is done, the compensation will end.
COMPENSATION CESS
Another source explained that there is no reduction in the tax incidence on pan masala, and that will remain at 88 per cent.
As on date, it is 28 per cent GST and 60 per cent of compensation cess; it will now be 40 per cent GST plush 48 per cent cess.
On the issue of cigarettes, he said tobacco is one of the few commodities continues to attract both GST and excise duty, a position upheld by the Supreme Court.
Source: businessline
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