Levy a higher GST rate on tobacco, sugared beverages

Context: Over the past seven years,
since the introduction of the Goods and Services Tax (GST), there have been no
significant increases in GST rates on harmful products such as tobacco and
sugar-sweetened beverages, except for two minor hikes in National Calamity
Contingent Duties (NCCD) on tobacco. This has made these products more
affordable, undermining efforts to curb their consumption. In this context, the
proposal by the Group of Ministers (GoM) to raise the highest GST tier on
tobacco and sugar-sweetened beverages from 28% to 35% is a welcome step.
However, further tax reforms are essential to effectively tackle the public
health and fiscal challenges associated with these products.

Key points

·      
Overview: The
Group of Ministers (GoM) on GST Rate Rationalisation met on December 2, 2024,
and proposed significant changes to the Goods and Services Tax (GST) structure.
These changes primarily affect sin goods like cigarettes, tobacco products, and
aerated beverages, as well as apparel.

·      
Next step for the GoM: The
GoM report will be reviewed and discussed in detail by the GST Council during
its meeting on December 21, 2024. The GST Council, chaired by the Union Finance
Minister, will have the final say on the proposed tax changes. There may be further
discussions on periodic rationalisation of GST rates in future meetings of the
Council.

·      
The 4-Tier GST Structure: Currently,
the GST system in India is organized into four tax slabs-

Ø 
5%: For essential goods.

Ø 
12%: For items of medium importance.

Ø 
18%: For standard goods.

Ø 
28%: For luxury and demerit goods
(e.g., high-end cars, tobacco, aerated beverages).

In
addition to these, there are cesses applied on demerit goods like cigarettes
and aerated drinks, further increasing their tax burden.

·      
Other Proposals Discussed in Previous
GoM Meetings: Packaged Drinking Water - The
GoM has proposed reducing the GST on packaged drinking water (20 liters or
more) from 18% to 5%.

Bicycles
- The proposal to reduce the GST on bicycles costing
less than ₹10,000 from 12% to 5%.

Exercise
Notebooks: A proposal to reduce GST on exercise notebooks from 12% to 5%.

Luxury
Shoes - GST on shoes costing above ₹15,000 would be increased
from 18% to 28%.

Luxury
Watches - The GoM suggested increasing the GST on wristwatches
costing above ₹25,000 from 18% to 28%.

·      
Conclusion: The
proposed 35% GST on cigarettes, tobacco products, and aerated beverages could
discourage consumption of these products, especially cigarettes and tobacco,
which are harmful to health. It could lead to increased revenue collection for
the government but may also raise concerns about the price elasticity of demand
for these goods. A higher tax could drive some consumers to the black market
for cheaper products.

Key proposals by the GoM

·      
GST Rate on Sin Goods: The
GoM has proposed a new 35% GST rate on certain sin goods like-

Ø 
Cigarettes

Ø 
Tobacco products

Ø 
Aerated beverages

Currently,
these goods are taxed at a 28% GST under the four-tier GST system. The
introduction of a 35% rate aims to curb the consumption of these goods, which
are often associated with negative health and environmental impacts. Additionally,
these goods attract a cess on top of the GST, making them more expensive and
discouraging consumption.

·      
GST Structure on Apparel:
The GoM also proposed changes to the GST rate on readymade garments based on
their price-

Ø 
Garments costing up to ₹1,500: GST
reduced to 5% (from the current 12%).

Ø 
Garments costing between ₹1,500 and
₹10,000: GST would be 18%.

Ø 
Garments costing above ₹10,000: GST
would be 28%.

·      
Overall GST Rate Rationalisation:
The GoM report proposes tax adjustments on a total of 148 items.