Tobacco cess to stay until pandemic loans repaid, GST Council clears two-slab structure

In a landmark reform of India’s indirect tax regime, the Goods and Services Tax (GST) Council on September 3 approved a two-tier structure of 5% and 18% — a sweeping rationalisation that will take effect from September 22. But one category remains untouched: tobacco.

Finance Minister Nirmala Sitharaman announced that cigarettes, pan masala, gutkha, chewing tobacco and related products will continue to attract both GST and the compensation cess until pandemic-era loans are fully repaid.

“Pan masala, cigarettes, gutkha, unmanufactured tobacco and beedis will remain under the existing cess regime until the loan and interest obligations under the compensation account are discharged,” Sitharaman told reporters after the Council’s 56th meeting, which stretched over ten hours. “Once repayments are complete, cess will end and these products will instead carry a special GST rate of 40%.”

The Centre had borrowed ₹1.1 lakh crore in 2020-21 and ₹1.59 lakh crore in 2021-22 to compensate states for GST shortfalls during the pandemic. Budget documents show ₹78,104 crore was repaid in 2023-24 and another ₹1.24 lakh crore in 2024-25. This year, the government plans to repay ₹67,500 crore out of an estimated ₹1.67 lakh crore to be collected as compensation cess. Sitharaman expressed confidence the debt would be cleared “well within this calendar year.”

Economists see fiscal risk, Centre disagrees

The new two-slab GST structure — a sharp simplification from multiple existing rates — is expected to cut taxes on hundreds of daily-use goods. Sitharaman framed the move as a relief for households. “Every tax levied on the common man’s items has undergone rigorous review. In most cases, rates have come down drastically,” she said.

Yet, concerns about revenue losses loom. HSBC economists recently estimated the rationalisation could cost the exchequer around ₹1.43 lakh crore, or 0.4% of GDP, to be shared between Centre and states. They noted, however, that lower rates could boost demand and long-term growth.

Revenue Secretary Arvind Shrivastava rejected the “revenue loss” framing, estimating instead a “net revenue implication” of around ₹48,000 crore based on 2023-24 consumption data. He argued that stronger compliance, consumer response and tax buoyancy would make the overhaul fiscally sustainable.

On the macroeconomic impact, Sitharaman was cautious but optimistic: “It will be too much for me to speculate on GDP now. But I think it will have a very positive impact.”