NEW DELHI: In a decisive move, Finance Minister Nirmala Sitharaman announced that the ongoing compensation cess on tobacco products—including cigarettes, pan masala, gutkha, beedi, zarda, and unmanufactured tobacco—will continue to be there until the cess-linked government loans are paid off. However, no specific timeline has been mentioned yet, but she clarified that the government will decide the date later.
“Pan masala, guthka, cigarettes, chewing tobacco like guthka, unmanufactured tobacco like bidi will continue at the existing rates of GST and compensation cess, where applicable, till the loan and interest payment obligation under the compensation cess accounts are completely discharged,” said Finance Minister, Nirmala Sitharaman, during the media briefing after the GST Council meet on Wednesday.
Without specifying any timeline, she mentioned that the loans would be repaid “well within this calendar year” and assured that cess collection will be stopped immediately once full repayment is achieved.
“The Union Finance Minister and the Chairperson of the GST council are actually authorised to decide on the actual date for the transition for these tobacco-related products, as soon as the loan and interest rate are cleared,” said the minister.
The total borrowing of the Central government stood at Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 to meet a part of the shortfall in cess collections. According to the Union Budget for 2025-26, the government expects to collect Rs 1.67 lakh crore as compensation cess in the current fiscal, with repayment of Rs 67,500 crore for these loans scheduled for the year. Previously, the government has paid an amount of Rs 78,104 crore in 2023-24 and Rs 1.24 lakh crore in 2024-25, as per the Budget documents.
As a part of GST 2.0, the government has introduced a two-slab structure of only 5% and 18% tax slabs and removed compensation cess on most of the items, barring exceptions for the sin goods. While the opposition states have asked for the mechanism to address the revenue loss that the states will have to incur due to rate rationalisation and removal of compensation cess, the Centre is yet to confirm the same.
“We have estimated a figure, we expect that a net fiscal implication. We won't call it a revenue loss, as that doesn’t seem to be the correct terminology. The net revenue implication of this proposal is expected to be around Rs 48 thousand crore. This is on the consumption base of 2023-24,” said Arvind Shrivastava, Revenue Secretary.
However, he assured that the government expect the buoyancy to play a role because of the rate rationalisation exercise, and this will boost the overall consumers’ spending. The government expects the entire GST rate rationalisation exercise to be “fiscally sustainable” for both the Centre and the states.