In pursuance of the recommendations of the GST Council in its 14^th Meeting held on 18.05.2017 and 19.05.2017, the Compensation Cess rates under Section 8 (2) of the Goods and Services Tax (Compensation to States) Act, 2017, was notified vide notification No.1/2017-Compensation Cess (Rate), dated 28.06.2017 on Intra-State or Inter-State supply of the specified goods, including cigarettes.

In respect of cigarettes, the Fitment Committee had recommended that in line with the weighted average VAT rate [28.7%], the GST rate on cigarettes may be kept at 28%. In addition, Compensation Cess may be levied on cigarettes at rates equal to 1.05 times the Specific Excise Duty Rates [net of NCCD]. However, this method of calibrating the Compensation Cess did not take into consideration the cascading of taxes [that is in earlier regime VAT being charged on value inclusive of the excise duty]. As a result, the total tax incidence on cigarettes in GST regime has come down, as compared to the total tax in pre-GST regime.

While any reduction in tax incidence on items of mass consumption would be welcome, the same would be unacceptable in case of demerit goods like cigarettes.

The GST Council in its 19^th Meeting  held today i.e. on 17.07.2017 reviewed the Compensation Cess rates on cigarettes and recommended the following increase in the same with effect from 00 hours on 18^th July, 2017 i.e. the midnight of 17^th and 18^th July, 2017:

		Compensation Cess Rates
Tariff Item		Present rate	Proposed Increase	New rates
	Non- filter
2402 20 10	Not exceeding 65 mm	5% + ₹ 1591 per thousand	Rs.485 per thousand	5% + Rs.2076 per thousand
2402 20 20	Exceeding 65 mm but not 70 mm	5% + ₹ 2876 per thousand	Rs.792 per thousand	5% + Rs.3668 per thousand
	Filter
2402 20 30	Not exceeding 65 mm	5% + ₹ 1591 per thousand	Rs.485 per thousand	5% + Rs.2076 per thousand
2402 20 40	Exceeding 65 mm but not 70 mm	5% + ₹ 2126 per thousand	Rs.621 per thousand	5% + Rs.2747 per thousand
2402 20 50	Exceeding 70 mm but not 75 mm	5% + ₹ 2876 per thousand	Rs.792 per thousand	5% + Rs.3668 per thousand
2402 20 90	Others	5% + ₹ 4170 per thousand	31%	36% + ₹ 4170 per thousand

 

Compensation cess increase restores pre GST tax parity on cigarettes by raising cess components across cigarette categories. The GST Council increased Compensation Cess rates on specified cigarette tariff items effective the midnight between 17 and 18 July 2017 to align total GST era tax incidence with pre GST levels. The prior calibration-linking Compensation Cess to specific excise net of NCCD-failed to account for the earlier cascading effect of VAT on excise, resulting in a lower overall burden under GST. The Council raised specific and ad valorem cess components across categories by length and filtration to restore parity, citing the need to avoid reduced taxation on demerit goods.