The first GST Council meeting after the rollout of the goods and services tax (GST) has chose to increase the cess on cigarettes in a bid to prevent manufacturers from reaping an annual windfall of Rs 5,000 crore, Finance Minister Arun Jaitley said on Monday.
The compensation cess on cigarettes consists of two components - an ad valorem tax of 5 % and a numerical amount on each category of filter and non-filter varieties.
"It's shocking that after having stated publicly for so long that all taxes are meant to be kept "revenue-neutral", the GST Council went ahead and tinkered the structure in a manner that leads to an 8-16% hike in total indirect taxes on cigarettes". The cess rate varied from Rs 2,126 to Rs 4,170 for cigarettes of different lengths.
The cess was made up of 5 percent ad valorem rate and a fixed per thousand stick rate based on length of cigarettes.
According to the Morgan Stanley report, the latest policy update implies 11-21% increase in tax for cigarettes versus that in F17-a clear negative with obvious impact on volume growth and valuations multiples. "As a result, the total tax incidence on cigarettes in GST regime has come down, as compared to the total tax in pre-GST regime".
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For other cigarettes, the cess would be 36 percent plus Rs 4,170 per thousand sticks as compared to 5 percent plus Rs 4,170 now.
The minister said the department had no immediate plan of approaching the GST Council or the finance ministry in this regard. "Since we have a self correcting mechanism in the Council itself, we noticed it", Jaitley explained.
The minister further said that over 70 lakh excise, service tax and VAT assessees have migrated to the GSTN portal and over 5 lakh new registrations have happened. "I think it is a rate issue". The GSTN portal is able to comfortably take this load, he added.
"In a large number of products we have seen that input credit helps in bringing down the cost", he said.