Due to an anomaly, taxes on cigarettes had dropped in the new GST regime. Manufacturers had the choice to either pass on the benefit to consumers or pocket the margin.

The government then found that producers were opting for the latter.

To correct the situation and to save itself from losing Rs. 5,000cr in revenue, the government has increased cess per stick by 48p.

What went wrong?

Earlier, the value added tax (VAT) on cigarettes was 28.7%. The GST was fixed at 28%, plus an additional compensation cess was levied at 5% of the specific rates.

However, an important fact was overlooked: that the VAT was charged on the total value including excise duty.

"As a result, the total tax incidence on cigarettes has come down," the finance ministry said.

Manufacturers earned an addtional Rs. 5,000cr, ITC stocks rose

In the aftermath of the anomaly, cigarette manufacturers, who decided not to pass the lower tax benefits to consumers, would have earned a margin of Rs. 5,000cr. The government would have lost revenue amounting to similar figures.

After GST rates were announced in May, stocks of ITC gained over six per cent and touched a 52-week high.

The government steps in: Fixed cess hiked by Rs. 485-792

The government has increased cess by 79p per stick. The 28% GST as well as the 5% ad valorem cess remain, but the fixed cess has been hiked from Rs. 485 to Rs. 792 per 1,000 sticks.

The impact on prices is still unclear.

The GST Council will hold a meeting in August first week to review the implementation of the new tax regime.

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