You are correct. As per media reports, 3 slabs are being contemplated: 5%, 18% and 40% (sin goods)
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In reality, this 40% tax will be passed on to customers.. making cigarettes a lot more expensive. Historically, whenever prices rise in this manner, it creates a price gap that fuels the illicit cigarette trade. This could undermine legitimate businesses and also result in a loss of tax revenue to the exchequer..
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As anticipated, there would be few complex moving parts to the Proposed GST rates.
I can foresee a possibility that, with many complex moving parts above 3 slabs recommended, the gains of Tax reduction may be minimal. My personal opinion has always been that, the complexity of any Tax regime always creates loop holes and inefficiencies in the system resulting into sub-optimal benefits to the exchequer.
(I may be wrong in my analysis!!)
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“Taxes on cigarettes in India remain one of the highest in the world as a percentage of per capita GDP “
“Historically, steep increases in taxation have adversely impacted tax collections and legal cigarette volumes, while a stable tax regime has led to buoyancy in tax collections”
Source - ITC FY25 Annual report
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This is the reason Chinese illegal cigarettes are taking over a sizeable share of Indian markets resulting in a huge revenue loss for the country. The GST council should consider this before making any recommendation for further increase of taxes.
However the increase will be passed on to the consumer and don’t see any drastic hit to ITC except some short term volatility.
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The PE premium that HUL and Nestle get is also because of the hugely profitable franchises they have created. ITC margins in the Non Cigarette FMCG biz are abysmal. No one doubts that they are an in-efficiently run business. Therefore the ITC PEs will always remain at a huge discount
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True but I believe with backwards integration and creating new brands through organic and inorganic means can change the scenario in a decade or so. HUL and Nestle have already hit the ceiling and are already a mature business
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This is where we need restraint the urge to over complicate the taxation regimes, but unfortunately the evidence speaks against it. Experts have built several complex layers in the current GST regime and General Taxation regimes, leaving gaps. Illegal cigarette business takes away the benefits of Increased Taxes where as if you keep only 2 tax rates, it could actually induce more willingness among population to pay taxes and buy legal products.
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During times of GST uncertainty & pessimism, there is a good news in one of the major business segment i.e. ITC Paper Division (ITC-PSPD). Minimum import price declared - which has put entire paper sector on huge demand atleast for the day.
DGFT Notfication-MIP-VPB-22.08.2025-RP.pdf (750.7 KB)
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