GST - bonanza for cigarette industry
JUNE 21, 2017
By M K Gupta IRS(Retd), Former Vice Chairman Settlement Commission; DG Audit, CBEC
WORLD Bank and WHO have impressed that to curb smoking the tax incidence shall be about 70% of the retail price. Prior to 1983 central excise duty on cigarettes was based on transaction value. Duty rates were so fixed that the tax amount is about 70% of the retail price. Industry successfully brought this incidence to about 60% by offloading from the price certain expenses which should have formed part of the taxable value. In 1983to meet the challenge of under valuation, the government imposed duty linked to the retail price. The duty incidence varied between 70% to 75% of the retail price. Industry found its own ways and means to minimize the tax incidence.
In 1987 the government imposed excise duty on the basis of length. In 2005/2006 the State government got power to levy VAT on cigarettes. Vat is levied at varied rates on cigarettes by states. On an average, VAT incidence is about 25% on the ex factory price including duties of excises. The existing rates of duties of excise on filter cigarettes are as below:
Length
|
Excise duty/1000cig
|
Health cess/1000cig.
|
NCCD/1000cig
|
Total central tax/1000 cig
|
<65 mm
|
1280
|
311
|
215
|
1806
|
>65<70 mm
|
1740
|
386
|
260
|
2386
|
>70<75
|
2335
|
541
|
370
|
3246
|
>75 mm
|
3375
|
811
|
560
|
4746
|
|
|
|
|
|
Under GST, Cigarettes would be liable to GST rate of 28% plus compensation cess. The rates of compensation cess are as below (as recommended by GST Council):
Length
|
Rates of compensation cess
|
<65 mm
|
5% +1591
|
>65<70 mm
|
5% +2126
|
>70<75
|
5% +2876
|
>75 mm
|
5% +4170
|
Legally speaking, in addition to GST and Compensation Cess, Cigarettes are also liable to excise duty. The government has given to understand in media that there will be no excise duty on cigarettes in GST regime. It means in GST tax burden on cigarettes will be 28% GST plus compensation cess.
The tax incidence on certain types of cigarettes in GST regime will be less by between Rs.516 to 977 per 1000 cigarettes assuming that retail prices of cigarettes would remain the same post GST.This is evident from the following:
Existing Law Under GST
|
Length75 mm
|
In Rupees
|
Length 75 mm
|
In Rupees
|
MRP of pack 10 Cigarettes
|
89
|
MRP of pack 10 Cigarettes
|
89
|
Trade margins 6%
|
5.34
|
Trade margins 6%
|
5.34
|
Vat 25%
|
16.74
|
Fixed cess
|
28.76
|
duties
|
32.46
|
GST +5% cess = 33%
|
13.62
|
Total tax
|
49.20
|
Total tax
|
42.38
|
Tax difference Rs.6.82 per 10 cigarettes i.e. Rs. 682per 1000 cigarettes.
Existing Law Under GST
|
Length>75 mm
|
In Rupees
|
Length>75 mm
|
In Rupees
|
MRP of pack 10 Cigarettes
|
140
|
MRP of pack 10 Cigarettes
|
140
|
Trade margins 6%
|
8.40
|
Trade margins 6%
|
8.40
|
Vat 25%
|
26.32
|
Fixed cess
|
41.70
|
duties
|
47.46
|
GST +5% cess = 33%
|
22.31
|
Total tax
|
73.78
|
Total tax
|
64.01
|
Tax difference Rs.9.77 per 10 cigarettes i.e. Rs. 977per 1000 cigarettes.
Existing Law Under GST
|
Length 69 mm
|
In Rupees
|
Length 69 mm
|
In Rupees
|
MRP of pack 10 Cigarettes
|
60
|
MRP of pack 10 Cigarettes
|
60
|
Trade margins 6%
|
3.60
|
Trade margins 6%
|
3.60
|
Vat 25%
|
11.28
|
Fixed cess
|
21.26
|
duties
|
23.86
|
GST +5% cess = 33%
|
8.72
|
Total tax
|
35.14
|
Total tax
|
29.98
|
Tax difference Rs.5.16 per 10 cigarettes i.e. Rs.516 per 1000 cigarettes.
From the above it is evident that in the GST regime incidence of tax will be less on cigarettes as compared to the existing law by considerable amount. On an average it may be assumed that there will be saving of about Rs. 700 per 1000 cigarettes. Consumption of cigarettes produced is about 100 billion. It means there would be tax saving of Rs. 7000 crores by the cigarette industry per year in GST regime. Hopefully,the Government and the Industry would be aware of Section171 of the CGST, Act.
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