Big GST Shakeup: Sin Taxes Up, Some Essentials Down – 35% Tax on Cigarettes, Aerated Drinks

Big GST Shakeup: Sin Taxes Up The Group of Ministers (GoM) on GST rate rationalization has recommended increasing the tax rate on aerated beverages and other “sin goods” such as tobacco products to 35% from the current 28%, according to an official statement. This proposal will be reviewed by the GST Council, led by the Union Finance Minister and state finance ministers, during its meeting on December 21, where a final decision on these tax revisions will be made.

Currently, the GST system operates under a four-tier structure with tax slabs of 5%, 12%, 18%, and 28%. Essential goods are either exempt from GST or taxed at the lowest rates, while luxury items and demerit goods such as cars, washing machines, and aerated beverages fall into the highest tax category and often incur additional cess.

The GoM has submitted its finalized report, proposing a new 35% tax rate specifically for products like aerated beverages and tobacco. The GST Council will also deliberate on whether to maintain the GoM for ongoing rate rationalization assessments.

Following this announcement, shares of Varun Beverages, a major PepsiCo bottling partner in India, dropped by as much as 5.2% to Rs 600 on the BSE. Varun Beverages generates a significant portion of its revenue from aerated beverages, which have faced growth challenges due to high GST rates. Despite the recent dip, its stock has risen 2.6% over the past month and 9% over six months.

A report by the Indian Council for Research on International Economic Relations (ICRIER) in October highlighted that the carbonated soft drinks (CSD) sector in India has struggled to expand due to heavy taxation. According to data from the World Bank, India’s total tax rate on sugar-sweetened beverages (SSBs) was among the highest globally in 2023, at 40%.

Big GST Shakeup: Sin Taxes Up Shares of ITC Ltd., the conglomerate spanning cigarettes to hotels, opened 2.5% lower on Tuesday, December 3, at ₹466, reflecting concerns over potential changes in cigarette taxation. The stock has declined 11% from its recent high of ₹528.

Sources indicated that the Group of Ministers (GoM) is considering a “special rate” of 35% on tobacco products and aerated beverages. Analysts are closely monitoring how this proposed tax would interact with the current compensation cess, with three key scenarios emerging:

Scenario 1:

If the 35% rate is applied in addition to the existing cess, it could lead to a tax increase of 5% to 12% for ITC, necessitating a price hike to offset the added cost.

Scenario 2:

If the special rate replaces only the ad valorem portion of the cess, the impact would be largely neutral, maintaining the current tax burden.

Scenario 3:

If the new rate entirely replaces the current cess, ITC could see a reduction in overall tax liability of nearly 20%, potentially easing financial pressure.

Macquarie noted that cigarettes currently incur a 28% GST and a compensation cess ranging from 5% to 36%, depending on the length of the cigarette. If the new tax is imposed in addition to the existing cess, ITC would likely need to implement a single-digit price increase to maintain margins.

Of the 38 analysts covering ITC, 33 recommend a “buy,” three suggest “hold,” and two have issued a “sell” rating, highlighting cautious optimism amid potential regulatory changes.

Big GST Shakeup: Sin Taxes Up In a significant move towards restructuring the GST framework, the Group of Ministers (GoM) on rate rationalization has recommended introducing a special 35% GST rate for demerit goods such as aerated drinks, cigarettes, and tobacco products, up from the current highest rate of 28%. This proposal is part of a broader strategy to offset revenue losses from potential rate cuts on essential items.

The GoM finalized its report ahead of the GST Council meeting scheduled for December 21 in Jaisalmer. The current four-tier GST structure—5%, 12%, 18%, and 28%—will remain unchanged for now. However, the new 35% rate would apply specifically to sin goods and luxury items, including high-end cosmetics, shoes, and watches.

Among other proposals, the GoM suggested revising GST rates on ready-made garments:

• 5% for garments priced up to ₹1,500,
• 18% for those between ₹1,500 and ₹10,000,
• 28% for garments exceeding ₹10,000.

Additionally, the GST on life and health insurance premiums may also be reconsidered, with exemptions likely for senior citizens and policies under ₹5 lakh, while retaining the 18% rate for higher-value policies.

The GoM on compensation cess, led by the Minister of State for Finance, has sought a six-month extension to finalize its report on the future of the cess levied on luxury and sin goods. Originally set to expire in June 2022, the cess was extended to March 2026 to repay the loans taken during the COVID-19 pandemic to compensate states for revenue losses.

The GST Council’s final decision on these proposed changes will be crucial in shaping India’s indirect tax regime and ensuring balanced revenue collection for both the Centre and the states.