The goods and services tax (GST) on pan masala, cigarettes and tobacco products based on their retail sale price (RSP) may be levied even before the compensation cess is phased out and the new 40% tax kicks in, sources told FE. The move is aimed at plugging the massive tax evasion in the sector and widening the tax base.The 56th GST Council on September 3 decided that tax will be levied on RSP instead of the transaction value on sin goods such as pan masala, gutkha, cigarettes, manufactured tobacco, and chewing tobacco like zarda.
The current tax incidence (GST plus cess) on the sin items varies widely, from 60-80% in some cases to as high as around 160-200% for items like gutkha.As part of the GST 2.0 reforms, the tax rate on specified “sin goods” will be hiked from the current 28% to 40% once the compensation cess is likely scrapped by October or so. These items will also come to attract an additional levy over and above the GST rate to maintain the high tax incidence, Central Board of Indirect Taxes & Customs (CBIC) chairman Sanjay Kumar Agarwal told FE on Thursday.
The move to RSP-based taxation is seen as shifting the burden of taxation to the manufacturing stage in the evasion-prone sector. “Whenever RSP-based taxation is notified to be applicable, from that date it will become applicable. It is not necessarily that we wait till that time the new rate comes into effect. It can happen before that,” a senior official told FE.
Why the shift to RSP-based taxation?
The switchover to the RSP-based GST levy, tax experts point out, is similar to what was being done in the erstwhile excise duty regime.“Rampant tax evasion beyond the manufacturing stage is the key reason for this U-turn,” said Rahul Renavikar, managing director at Acuris Advisors.“While the government is expected to gain GST revenue from this switchover, the supply chain partners beyond the manufacturing stage will stand to lose the input tax credit, thereby increasing their cost of doing business,” he added.
Broader impact on stakeholders
Sandeep Sehgal, partner-tax, AKM Global, said: “The shift to GST assessment on the RSP rather than the transaction value will significantly increase the tax burden for the tobacco and pan masala sector.”However, goods are often sold at prices lower than the RSP printed on the pack, as the RSP only denotes the maximum price that may be charged to consumers, and not necessarily the actual sale price.“Calculating GST on the highest possible sale price effectively increases the taxable base, thereby pushing up the overall tax liability for manufacturers and distributors in the sector,” Sehgal said.
Central GST formations have detected tax evasion of around `7.08 lakh crore across sectors in the last five years, including input tax credit fraud of Rs 1.79 lakh crore, according to the finance ministry.