In a significant development, the Group of Ministers (GoM) set up by the GST Council has proposed a new special rate of 35% on tobacco products and aerated beverages. This proposal is part of a broader effort by the GoM on Rate Rationalisation, which is examining ways to restructure GST rates for various goods and services across India. The move aims to better align tax rates with product value and consumption, with discussions set to take place at the GST Council meeting scheduled for December 21, 2024 in Jaisalmer.

Currently, all tobacco products are taxed at the standard GST rate of 28%, with an additional compensation cess that can range from 11% to 290% depending on the type of tobacco product. Tobacco leaves, however, are taxed at a lower rate of 5% under the reverse charge mechanism, meaning the recipient is responsible for remitting the tax to the government rather than the supplier. The 35% special rate for tobacco is expected to further enhance the tax burden on these products, making them among the most heavily taxed goods under the GST regime.

Aerated beverages, which are currently taxed at the highest GST slab of 28%, also attract an additional 12% compensation cess. This applies regardless of the beverage's sugar or fruit content. In recent months, there has been growing concern about the health implications of sugary drinks, contributing to the GoM's decision to propose a special GST rate. The GoM on Rate Rationalisation, chaired by Bihar Deputy Chief Minister Samrat Choudhary, has been tasked with addressing such issues and ensuring that the tax system is both fair and revenue-neutral.

Apart from proposing changes to the GST rate on tobacco and aerated beverages, the GoM is also deliberating on tax slabs for other goods, such as ready-made garments, footwear, cosmetics, and luxury items like handbags and watches. The goal is to ensure that luxury goods face higher GST rates while daily-use and essential items like bottled water, bicycles, and exercise books are taxed at lower rates. This will make essential goods more affordable for the general public while ensuring that luxury goods contribute more to the economy.

Another area of focus for the GoM is the GST rates for health and life insurance premiums, which are currently taxed at 18%. There is significant momentum within the GST Council to reduce these rates, making insurance more affordable for citizens. This would be a crucial step towards promoting greater access to health and life insurance, ensuring that essential services are more accessible to the masses.

According to Krishan Arora, a Partner at Grant Thornton Bharat, the GoM's proposal for a special rate on goods like tobacco products and aerated drinks, along with the restructuring of rates for 148 other goods, appears to be aimed at compensating for potential revenue shortfalls resulting from the reduction of rates on common-use items and exemptions such as health and life insurance premiums. The GoM's strategy seems to balance the anticipated revenue decline from reductions in health and life insurance with revenue increases from adjustments to other products. This approach is designed to maintain a revenue-neutral position, ensuring that overall revenue remains stable while making certain products more affordable.

The GoM also seeks to address concerns regarding the high GST cess rates imposed on tobacco products, which can range dramatically depending on the type of product. These rates often lead to higher consumer prices and contribute to the burden on consumers. The 35% special rate on tobacco is expected to further tighten the tax regime for these products, ensuring that the government’s tax revenue from this sector remains substantial while maintaining fairness in the broader tax structure.

As the GST Council prepares for discussions on these reforms, the impact on businesses and consumers will be closely watched. The GoM's proposed changes to the GST structure could reshape how products are taxed, with luxury goods facing higher rates and essential products seeing a reduction in taxes. The outcome of the December 2024 meeting will determine how these proposals are implemented and whether further adjustments are required to ensure that the tax system remains fair and effective.

In conclusion, the GoM's proposal for a 35% special rate on tobacco and aerated beverages is part of a broader effort to rationalise GST rates in India. By adjusting the tax structure for various goods, including luxury items and essential goods, the GoM aims to strike a balance between fair taxation and revenue neutrality. The GST Council is expected to further discuss these proposals during the upcoming meeting, which could lead to significant changes in the GST landscape in India.

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