The Federation of All India Distributors Associations (FAIDA) has urged the government to revamp the way cigarettes are taxed under the GST. In a representation to the Finance Ministry, FAIDA has suggested shifting to a tax-at-source mechanism, where GST is levied upfront on the maximum retail price (MRP) of cigarettes, instead of the current multi-stage taxation system.
According to sources, the Finance Ministry is reviewing the proposal and is likely to place it before the GST Council at its meeting scheduled for 3-4 September 2025. The discussions may also cover pan masala, another product category vulnerable to illicit trade and under-invoicing.
Current vs. Proposed Mechanism
Under the current framework, GST is collected at multiple levels, starting from manufacturers, followed by distributors, wholesalers, and finally retailers. Distributors argue that this layered system leaves room for leakages and under-reporting, especially at wholesale and retail levels, resulting in significant revenue losses for the government.
FAIDA has proposed that taxing cigarettes upfront on their MRP would eliminate downstream evasion, ensure the government collects full revenue at the source, and reduce the compliance burden on distributors.
Distributors' Concerns
The association also highlighted that distributors face repeated scrutiny from tax authorities, despite sourcing goods directly from manufacturers through transparent channels. "We are being held responsible for post-sale leakages beyond our control. This is deeply unfair," the representation stated, according to sources.
Many wholesale and retail transactions allegedly remain unbilled or under-reported, but the burden of compliance often falls disproportionately on distributors. By adopting an MRP-based GST structure, FAIDA believes the system would become simpler, more transparent and fairer.
Expert View
Tax experts believe such a move could boost collections and streamline compliance. "An MRP-based model would bring greater clarity and reduce disputes between industry and administration," one expert noted. However, he cautioned that states may demand additional safeguards, possibly through a separate State Excise levy, to protect their revenue streams.
Another factor under consideration will be the impact on product prices. While upfront taxation may strengthen government finances, it will be crucial to maintain a balance between revenue mobilisation, market stability and consumer affordability.
What Lies Ahead
If accepted, the proposal would represent a major shift in GST policy for the cigarette sector, which has long been plagued by illicit trade. With cigarettes and pan masala expected to be key agenda items at the GST Council's September 3-4 meeting, stakeholders across the industry are watching closely for outcomes that could reshape taxation in one of India's most revenue-sensitive sectors.
Established in 1996, FAIDA represents over 6 lakh distributors across FMCG, food, beverages, mobiles, telecom and cigarettes, catering to nearly 3 crore retailers nationwide, making it one of the largest distributor networks in the country.
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