GST 2.0 tussle:
Centre eyes extra duty over 40% slab on tobacco products; states push for 'significant' cut
Aug 18, 2025
Following the proposed GST 2.0 reforms, the government is considering additional duties on tobacco products to maintain current taxation levels. Several states are requesting a significant share in this supplementary taxation to offset potential revenue reductions. Discussions are ongoing regarding the structure of these duties, with states seeking either equal shares or independent taxation rights.
The government is reportedly considering imposing additional excise or special duties beyond the proposed 40% GST on tobacco products to sustain current taxation levels, following Prime Minister Narendra Modi's announcement of GST 2.0 reforms that eliminate compensation cess.
Several states are requesting a "significant share" in the supplementary taxation on tobacco items to offset immediate revenue reductions, according to Economic Times sources familiar with ongoing discussions regarding sin goods taxation, particularly tobacco.
"During the discussion some states asked for equal share on the additional duty to be imposed," disclosed one source anonymously.
The rate rationalisation ministerial group, led by Bihar's deputy chief minister Samrat Chaudhary, is likely to convene once more before the upcoming GST Council meeting to address this matter, with states anticipating next-generation GST reforms.
The GST Council will take the ultimate decision on this issue.
Presently, tobacco and related products, including cigarette, cigars, pan masala, cigarillos and hookah, face 28% GST plus compensation cess, central excise duty and national calamity contingent duty, totalling 53% indirect tax.
The past five years saw average yearly GST collections of Rs 51,000 crore from tobacco products, with additional education cess and surcharges from manufacturers reaching Rs 27,659.84 crore.
Finance officials, on Independence Day, proposed restructuring GST into two tiers, eliminating 12% and 28% slabs, while introducing a 40% category for select sin goods including tobacco products.
The proposal maintains that overall tobacco product taxation would remain unchanged. Without compensation cess, this requires implementation of alternative additional duties.
Various states seek either equal shares in additional duties or independent taxation rights, similar to alcohol's state excise duty system. They contend that existing indirect tax on tobacco products can exceed 53% without affecting revenue for central or state governments.
"A few states suggested that either it should be a basic excise duty, divisible between the Centre and states, or a central excise duty along with state excise duty - which would be a win-win for both, giving headroom to states to generate their revenue," revealed a source involved in discussions.
Kerala has formally requested compensation for revenue losses from GST reforms.
"The so-called simplification of GST rates announced by Modi will be devastating for state revenues," Kerala finance minister Thomas Issac said in a post on X. "The GST rates that have already been rendered below revenue neutral rate by 2018 pre-election simplification, will now shrink further. States must be compensated for the loss."
India's tobacco products remain globally amongst the most affordable, according to parliamentary standing committee's 139th report. The report indicated substantial scope for increased taxation, recommending 40% peak rate and significant excise duty increases.
[The Times of India]
