The government will impose additional levies on tobacco, pan masala and cigarettes to ensure that the total incidence of tax on these items remains the same once the GST rate of 40% on sin goods is implemented. A mechanism will be worked out soon. GST on luxury cars will continue to remain at 40% and will be applicable from September 22. 

It may be noted that while all other items will see a tax reset on September 22, the GST rate of tobacco, pan masala and cigarettes will come into force post-payback of the debt taken during the Covid-19 pandemic in FY21 and FY22 to compensate the states. The debt is likely to be paid back by the end of this year. 

“Once the compensation cess is recovered to repay the loans, the duty incidence on these items will be kept on the same level as these goods are attracting at present. It will not come down,” Sanjay Kumar Agarwal, Chairman, Central Board of Excise and Customs, told Fortune India. 

“As per law, more than 40% cannot be levied. But it will be ensured by way of other levies so that the incidence of tax on these items remains at the same level,” said Agarwal.

“Luxury cars will remain under the 40% slab, and the new rates will be applicable from September 22. As of now, the new rates do not apply to tobacco, pan masala, and chewing tobacco. On these items, a call will be taken at the appropriate time. But some mechanism will be worked out to keep the incidence the same,” said Agarwal. 

Pan masala currently attracts 28% GST and a 60% compensation cess, totalling 88%. Similarly, on cigarettes, there is GST, compensation cess, central excise and CCD. A similar arrangement is there on chewing tobacco. 

Finance minister Nirmala Sitharaman said in the press conference on GST Council decisions on Wednesday that the centre may pay off the loans taken to compensate the states in the wake of the Covid-19 pandemic by the end of this calendar year. 

During the launch of the GST, the states were assured that a 14% increase in their annual revenue for five years, between July 1, 2017, and June 30, 2022, would be protected. 

They were also guaranteed that any revenue shortfall would be compensated via a compensation cess levied on luxury and sin goods. However, during the Covid-19 pandemic, the central government borrowed a sum of ₹2.69 lakh crore in two tranches in FY21 and FY22, with which the states were compensated for the revenue gap during the pandemic.