The Indian tobacco sector stands at an unusual intersection. It’s a major revenue earner for the exchequer, yet it’s also one of the most tightly regulated industries for public health reasons. Despite the known risks and the repeated public health campaigns, the market is far from shrinking. WHO’s numbers put the reality into perspective- more than a quarter of a billion Indians use tobacco in some form, and the country has the highest global incidence of mouth cancer.
This high level of consumption means tobacco isn’t just a health matter; it’s a serious economic issue. The Goods and Services Tax, along with duties such as Central Excise and NCCD, has a direct bearing on how the industry prices its products, how much people end up paying, and how the government collects revenue.
Tobacco as a “Sin Good” and Why It Matters for Taxation
Products that harm health or society are usually taxed harder, not only to discourage usage but also to fund public welfare. Tobacco is a classic example. Even before GST came into effect, taxes on tobacco were already steep, spread across different layers like VAT, entry taxes, and Central Excise.
When GST was rolled out, it didn’t replace every single levy for tobacco. Instead, it added its own 28% rate while keeping some older taxes in place. This combination makes tobacco one of the most heavily taxed goods sold in India. WHO recommends that 75% of the retail price of such products should come from taxes. While India is close to that target, it still leaves scope for upward revisions.
Current GST Rates on Tobacco Products
Under the GST law, all major tobacco products, whether cigarettes, cigars, chewing tobacco, or pan masala with tobacco, fall into the highest slab of 28%. But that’s not where the tax stops. Over and above GST, there’s a Compensation Cess.
This cess isn’t uniform. It’s calculated differently depending on the item. Cigarettes, for example, attract a fixed amount per unit based on their length, and in some cases, an additional percentage-based charge on value. Chewing tobacco and hookah products face their cess rates.
The Likely Shift to 35% GST
There’s strong talk that the GST Council, in its upcoming meeting, might raise the GST rate on tobacco products to 35%.
Taxes That Apply Alongside GST
GST is only one part of the story. Tobacco also attracts:
Central Excise Duty, which continues to apply even after GST, unlike for most other products.
National Calamity Contingent Duty (NCCD), which funds disaster relief and preparedness. In 2023, the government raised NCCD on cigarettes by 16%, a move that significantly impacted retail pricing because it’s factored into the GST base.
Compensation Cess, which is imposed to make up for state revenue losses caused by the GST shift. For tobacco, this adds a substantial amount over the basic GST rate.
How does the Price Build Up in Layers?
The pricing sequence for tobacco products has a snowball effect. First, the base manufacturing cost is set. On this, excise duty and NCCD are added. The total then becomes the base for calculating GST at 28%. After that, the Compensation Cess is applied.
Because GST is charged after adding the earlier duties, the total tax load becomes heavier than many realise. Unlike in the pre-GST excise regime, there’s no option for abatements. Manufacturers pay on the full transaction value.
What does this mean for Manufacturers and Sellers?
For companies in the tobacco trade, high taxes mean thinner margins unless they pass costs to the customer. But pricing too high risks losing buyers to unregulated markets.
There’s also the matter of compliance. With different tax elements depending on product type, size, and composition, businesses need robust systems to avoid classification errors. Any misstep here can lead to disputes, penalties, and even reputational damage.
Public Health Arguments for Higher Taxes
From a health policy perspective, higher prices are one of the most effective tools to cut tobacco use. They hit hardest where it makes the most difference, with young users and people with limited disposable income.
Still, tax hikes alone won’t solve the problem. If they’re not backed by strong anti-smuggling enforcement, educational campaigns, and cessation support services, the public health benefits can be undermined.
The Budget 2023 Effect on NCCD
The 16% NCCD increase in the 2023 budget may look small in isolation, but it carries more weight in practice. Since NCCD is part of the GST base, any increase there has a ripple effect, boosting the GST amount and the cess payable as well.
Manufacturers face the choice of absorbing this impact or adjusting prices. Either route can affect demand, in one case through reduced profit margins, in the other by making the product less affordable.
Likely Trends Over the Coming Years
Several moves seem likely as the government keeps adjusting its approach:
- GST on tobacco may rise to 35% or beyond.
- Cess rates could be revised regularly to keep pace with inflation.
- Taxes across all tobacco products might be standardised to prevent people from switching to lower-taxed alternatives.
- Tracking technology could be expanded to monitor production and sales, reducing the scope for illicit trade.
The Government’s Revenue Balancing Act
Tobacco brings in thousands of crores in revenue each year. These funds are important for state budgets, public health programs, and emergency preparedness.
Yet this reliance creates a policy challenge, cut tobacco use too aggressively, and revenue drops. Raise rates too little, and consumption patterns may not shift enough to meet health targets. This is why tax changes tend to be incremental rather than drastic.
Conclusion
India’s tobacco taxation model, with GST at its core and other duties reinforcing it, ensures these products are among the costliest. The system’s twin objectives are clear: reduce use and keep revenue flowing. For businesses, this means tracking policy developments closely and adapting pricing and compliance systems quickly when changes come. For policymakers, it’s about finding the balance between fiscal needs and the urgent goal of protecting public health.
