New Delhi, July 17: Cigarette makers such as ITC and Godfrey Phillips saw the prospect of a Rs 5,000-crore windfall on account of an anomaly in the goods and services tax go up in a puff of smoke after the GST Council today tweaked the rates to neutralise the unintended gains.
The GST Council recalibrated the fixed component of the cess slapped on cigarettes, nullifying the benefit of a 6 to 8 per cent lower tax incidence that had left cigarette makers hugely chuffed about the switch-over to the GST regime.
Cigarette prices will not change as a result of the increased cess that will be effective from midnight tonight.
At the end of the first review of the GST regime since its launch on July 1, finance minister Arun Jaitley told reporters: "There are three components of tax on cigarettes - a 28 per cent GST rate plus a cess that has an ad valorem rate of 5 per cent and a fixed rate depending on the length of the cigarette. While the first two components remain unchanged, the third is being tweaked."
There are two cess slabs for non-filter cigarettes and four for filter sticks.
At its meeting on June 18, the council had fixed the rate on non-filter cigarettes with a length not exceeding 65 mm at Rs 1,591 per thousand. The fixed component of the cess on non-filter cigarettes with a length above 65 mm was set at Rs 2,876 per thousand.
In the case of filter cigarettes, the rates had been set at Rs 1,591, Rs 2,126, Rs 2,876 and Rs 4,170 per thousand for cigarette lengths not exceeding 65 mm, between 65 mm and 70 mm, lengths between 70 and 75 mm, and others, respectively.
The minister announced that the category-wise cess on cigarettes which was imposed based on the length of a cigarette was increased by Rs 485 per thousand sticks of 65 mm to Rs 792 per thousand sticks for those longer than 65 mm.
Jaitley said while working out the GST rate on cigarettes, the council had erred by failing to take into account the cascading effect of previous taxes and that is why the tax incidence under the GST regime was lower.
The correction made today through a short notice meeting of the GST Council convened through video conferencing aimed to make good the loss.
"The lower incidence of tax was resulting in a windfall for cigarette companies. This was never the intention of the council," he said.
Jaitley also said the GST Council would meet in the first week of August to review the progress of the implementation of the GST.
Jaitley said there were only two options for cigarette companies when the tax inadvertently got lowered - either to reduce prices and help boost cigarette sales, an idea that the government found repugnant, or to absorb the "windfall profit".
Analysts calculate that the lower tax incidence was to the tune of 6-8 per cent. Cigarette companies, however, had not lowered prices as they felt other input costs had gone up due to the GST.