Compensation Cess: GST Fitment Committee to review Compensation cess structure for Pan Masala

The GST fitment committee, comprised of revenue officials from the national and state governments, would assess the compensation cess levy on certain items with a higher risk of tax evasion, such as pan masala and mixed tobacco products.

Furthermore, the group may investigate the need for and rationalisation of unequal tax rates, as claimed by a government official in a media article. The development follows the recent release of a Group of Ministers (GoM) report. It proposes a change to cess element of the GST, which must be tied to the product’s Maximum Retail Price (MRP) quoted to customers.

The Goods and Services Tax (GST) Council endorsed a report by a ministerial panel chaired by Odisha Finance Minister Shri Niranjan Pujari during its February 2023 meeting.

Currently, these commodities are subject to the highest GST slab, i.e., 28%, with an extra compensation cess. Furthermore, the tax cess is dependent on the actual sales value (ad valorem tax). The cess rate on tobacco products, for example, is 290%, whereas the cess rate on paan masala is 135%.

The panel report, on the other hand, advises a fixed tax rate based on the retail sale price, which includes all municipal taxes, delivery, freight charges, packaging, and so on. The GST is still levied on transaction value.

According to a government official, the fitment committee would study the tax structure provided by the GoM and determine the viability of tying those with MRP. The goal is to limit the growing threat of tax evasion in the tobacco and other industries. The reviews would take time and might be completed by the next GST Council meeting.

The GoM research advocated a cess structure that is linked to the retail sale price of at least 38 items, including pan masala, chillum, hookah, and chewing tobacco. It ranges from 12% to 69% when compared to the ad valorem tax structure.

According to one of the panel members, the government intends to increase revenue collection at the first stage (or manufacturing level) by turning the ad valorem tax into a definite tax. That is possible if the cess is tied to the retail price of the goods. Because there is no other tax credit than the cess deposited in earlier stages, these modifications to the compensation cess element can be made by looking at subsequent stages.