GST Council Approves Major Tax Restructuring
The GST Council has approved a significant increase in taxes on sin and luxury goods, introducing a new 40% tax slab for items including tobacco, pan masala, aerated drinks, and premium vehicles. This move represents a major restructuring of India's indirect tax system as the government transitions to a simplified regime with two main slabs of 5% and 18%, alongside this special 40% rate.
What Are Sin Goods?
Sin goods, also known as demerit goods, are products considered harmful to health or society, such as tobacco and sugary drinks. These items now attract the highest tax rates under GST to discourage consumption and generate additional revenue for welfare spending. Unlike essential goods taxed at 5% or 18%, sin goods will be placed in the new 40% bracket.
Items Under the 40% Tax Slab
The new 40% GST rate applies to:
• Cars larger than 1,200 cc (petrol) and 1,500 cc (diesel)
• Motorcycles exceeding 350 cc
• Aircraft and helicopters for personal use
• Revolvers and pistols
• Yachts and leisure vessels
• Pan masala, gutka, bidi, and all tobacco products
• Aerated waters with added sugar
• Caffeinated and carbonated beverages
• Online gambling and gaming services
Why Higher Tax Rates?
The higher GST rate on sin goods is justified because these products are considered harmful to health and society. By making them more expensive, the government aims to discourage consumption while raising additional revenue for public welfare programs.
Cigarette consumption alone is estimated to drain over 1% of India's GDP through healthcare costs and productivity losses. The revenue from taxing these goods at higher rates is often used to fund welfare and health programs, creating a dual purpose for the levy - reducing usage while supporting social initiatives.
Demand for these items is highly price inelastic, meaning consumers often continue buying them despite higher prices. This ensures that tax collections rise steadily even if consumption doesn't fall significantly, making sin goods a reliable revenue source for the government.
Current Transition and Exceptions
Tobacco products currently attract 28% GST plus Compensation Cess. Finance Minister Nirmala Sitharaman clarified that this will continue until compensation loans to states are cleared, after which these goods will migrate to the 40% slab.
Notably, larger cars including SUVs will face a reduced rate of 40% GST compared to the previous 50% (28% tax plus 22% cess). Electric vehicles will remain at the 5% tax rate.
Broader GST Reforms
The overhaul also removes the earlier 12% and 28% slabs. Most food and textile items will now be taxed at 5%, while everyday household appliances such as refrigerators, air-conditioners, and large television sets will shift to the 18% category.
Officials state that the two-tier system will ease compliance, reduce consumer burden, and maintain high revenue inflows from goods with inelastic demand such as tobacco.
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