Govt specifies retail sale price based GST cess rate for pan masala, tobacco

The government has specified the retail sale price-based GST cess rate that would be levied on pan masala and tobacco manufacturers with effect from April 1. This is a departure from the earlier regime that imposed cess, over and above the 28 per cent Goods and Services Tax (GST) rate on ad-valorem basis.

As per a finance ministry notification dated March 31, the GST cess rate that would be applicable on pan masala is 0.32 times the retail sale price (RSP) of the pan masala pouch.

Pan masala, containing tobacco gutkha, now has a cess rate of 0.61 times the RSP, while the rate for smoking mixtures for pipes and cigarettes is 0.69 times.

Chewing tobacco , filter khaini, and jarda scented tobacco attract a cess of 0.56 times the RSP, and the rate for branded unmanufactured tobacco and hookah or gudaku is 0.36 times the RSP.

The new rates are applicable from April 1, 2023. Moving to RSP-based levy would mean that manufacturers would now have to pay the cess on the final retail price of masala and chewing tobacco at the time it crosses the factory gate.

This would help curb tax evasion as the cess would be collected at the first point itself.

AMRG & Associates Senior Partner Rajat Mohan said moving to an RSP-based system can provide a more stable source of revenue for the government in case of broken supply chains.

"In the new taxation scheme, the entire cess is collected at the first point of sale, i.e., the manufacturer itself, limiting the impact of tax evasion in the sector," Mohan said.

The estimated revenue from RSP-based cess rate on pan masala and tobacco is almost at the same level as was in the earlier ad- valorem regime.

However, in the earlier regime since there were instances of tax evasion, the revenue collection was lower. The government last month amended the GST law and capped the maximum rate of GST compensation cess that would be levied on pan masala, cigarettes and other forms of tobacco, linking it to the RSP of the product.

The maximum GST compensation cess rate for pan masala will be 51 per cent of the RSP per unit. Till March 31, the cess was charged at a maximum rate of 135 per cent ad-valorem.

The maximum rate for tobacco has been fixed at Rs 4,170 per thousand sticks plus 290 per cent ad-valorem or 100 per cent of the retail sale price per unit.

Till March 31, the highest rate was Rs 4,170 per thousand sticks plus 290 per cent ad-valorem.

In February, the GST Council, chaired by Union Finance Minister and comprising state counterparts, had approved the report of a panel of state finance ministers on plugging tax evasion in pan masala and gutkha businesses.

The GoM had recommended that the mechanism for levy of compensation cess on pan masala and chewing tobacco be changed from ad-valorem to a specific rate-based levy to boost the first stage collection of the revenue.