The government is considering an additional levy on tobacco and cigarettes to ensure that the tax incidence on these "sin goods" remains unchanged despite the upcoming GST overhaul.
Under the revised structure, effective September 22, 2025, sin goods and ultra-luxury items will be taxed at 40%, replacing the earlier 28% slab. However, with the proposed abolition of the 28% compensation cess later this year, the effective tax burden on items such as tobacco and cigarettes could reduce.
"Under GST, 40% is the maximum levy which can be charged. For the balance, we will find some mechanism to keep the incidence at the same level as now," said Sanjay Kumar Agarwal, Chairman of the Central Board of Indirect Taxes and Customs (CBIC), in an interview. He added that if a legislative amendment or Bill is required, the government will take the necessary steps.
Ultra-Luxury Goods to Be Spared Additional Levy
While tobacco products are expected to face this supplementary tax, ultra-luxury items such as high-end cars and motorcycles will only attract the flat 40% GST rate without any extra levy.
Compensation Cess Extended Till December 2025
Contrary to earlier expectations that the cess would end by October 31, 2025, Agarwal clarified that the compensation cess will now continue until December 2025, ensuring adequate revenue support during the transition.
Implementation Process Underway
The CBIC is currently working to ensure the smooth rollout of GST 2.0. According to Agarwal, two key exercises are ongoing:
- Notifications: Both the Centre and states will issue necessary notifications to formalize the new rates.
- IT System Updates: GST systems are being upgraded to incorporate the revised rates, along with a simplified registration and refund process.
Agarwal also stressed that industry players will need to update their ERP systems to ensure correct invoicing under the new rates starting September 22.
Industry Impact
While the move ensures that the government maintains its revenue from high-tax items such as cigarettes and tobacco, industry stakeholders are bracing for continued pressure on margins. For consumers, the price burden on sin goods is likely to remain unchanged, while ultra-luxury purchases will see a clear 40% GST rate without additional levies.
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