GST Council defers rollout of 40% tax on tobacco and pan masala
Sep 3, 2025
Synopsis
The Goods and Services Tax Council decided on GST 2.0. The new tax overhaul will be live from September 22, 2025. A simplified two-slab system is approved. Essential goods will have 5% tax. Standard items will have 18% tax. Sin and luxury products will have 40% tax.
The Goods and Services Tax (GST) Council has made it clear that tobacco and related products will be the only category to migrate to the new GST 2.0 framework at a later stage, even as the rest of the tax overhaul goes live from September 22, 2025.
At its 56th meeting in New Delhi on September 3, the Council approved the long-awaited shift to a simplified two-slab system — 5% for essential or “merit” goods and 18% for “standard” items — with a steep 40% slab reserved for sin and luxury products.
But unlike other goods and services, pan masala, gutkha, cigarettes, chewing tobacco, zarda, unmanufactured tobacco and bidi, that fall under the "sin tax" category, will remain under the existing GST plus compensation cess regime for now.
Cigarettes currently attract 28% GST plus a compensation cess—a mix of specific and ad valorem duties. The specific cess varies from Rs 2.1 to Rs 4.2 per stick depending on length, with an additional ad valorem of 5% (for sticks up to 74 mm) and 36% (for 84 mm).
A sin tax is an excise duty applied to goods regarded as harmful or socially costly. By raising the price of consumption, these taxes serve a dual purpose: discouraging usage while generating additional revenue for public welfare.
In fact, cigarette consumption alone drains over 1% of the country’s GDP, prompting the government to levy sin taxes on products harmful to public health. The revenue collected is often channeled into welfare programs, reinforcing the tax’s role in both reducing consumption and supporting social initiatives.
As taxes on sin goods are highly price inelastic (consumers addicted to such products continue to buy them despite higher prices), the government expects to see higher revenues rather than lower consumption.
[The Economic Times]
