GST Council approves highest tax rate of 40% on these goods

The Goods and Services Tax (GST) Council has approved a sharp hike in rates for sin goods, moving them from the earlier 28% slab to a new 40% rate. This comes as part of the transition to “GST 2.0,” a simplified two-slab structure that will feature just 5% and 18% rates, with the higher 40% reserved for sin and luxury items.

These changes are expected to roll out by September 22 2025. The Council has said tobacco products will continue at current GST + cess until the Compensation Cess loans are fully discharged, after which they will migrate into the 40% slab.

The Council, the apex body for GST decisions, met on September 3 to finalise the overhaul. Prime Minister Narendra Modi had already flagged the reforms during his Independence Day speech, calling them a “Diwali gift” for citizens.

Here’s a list of all that was hit with the highest tax slab:

• Tobacco products: Pan masala, Gutkha, Cigarettes, Chewing tobacco (like Zarda), Unmanufactured tobacco, Bidi, Scented tobacco
  
• Transportation sector: Certain luxury/selected transport-related goods and services moved from 28% to 40% (details to be notified under HSN list)
  
• Miscellaneous high-taxed items: Imported/dutiable personal-use articles and other miscellaneous goods shifted from 28% to 40% (specifics to be detailed in notifications)
• Cigars, cheroots, cigarillos, and cigarettes: 28% to 40%
• Sugary and flavoured drinks (including aerated waters with added sugar): 28% to 40%
• Luxury and premium cars with more than 1200cc petrol engines and 1500 cc diesel engines will attract 40%

A sin tax is an excise duty applied to goods regarded as harmful or socially costly. By raising the price of consumption, these taxes serve a dual purpose: discouraging usage while generating additional revenue for public welfare.

In fact, cigarette consumption alone drains over 1% of the country’s GDP, prompting the government to levy sin taxes on products harmful to public health. The revenue collected is often channeled into welfare programs, reinforcing the tax’s role in both reducing consumption and supporting social initiatives.

As taxes on sin goods are highly price inelastic (consumers addicted to such products continue to buy them despite higher prices), the government expects to see higher revenues rather than lower consumption.

The 40% club and what’s in it

“Sin goods” or “demerit goods” are items deemed harmful to health or society and are taxed at the highest rate. Products that will be placed under the 40% slab include:

• tobacco and related products: cigarettes, cigars, chewing tobacco, gutkha, pan masala
• sugar-sweetened beverages: carbonated, caffeinated drinks and energy drinks
• luxury vehicles: high-end cars and SUVs
• junk foods: processed items high in sugar, salt, or trans fats

Alcohol remains outside GST’s ambit and continues to be taxed separately by states through excise duties.

Meanwhile, cigarettes currently attract 28% GST plus a compensation cess—a mix of specific and ad valorem duties. The specific cess varies from Rs 2.1 to Rs 4.2 per stick depending on length, with an additional ad valorem of 5% (for sticks up to 74 mm) and 36% (for 84 mm).

However, according to an ET report, while the slab is being raised, the overall tax burden on tobacco will stay unchanged at 88%, combining GST and cess.

Impact on ITC and the tobacco industry

For corporates like ITC Ltd, which derives over 80% of its net profit from cigarettes, the new framework carries both risk and relief.

It becomes especially crucial as ITC’s stock has delivered no returns in the past two years, reflecting GST concerns.

On a weighted average basis, the consumer price of ITC’s cigarettes comprises 55% tobacco taxation, 12% channel margins, and 23% EBIT margin.

Investors have long been jittery over regulatory uncertainty, stake sales by British American Tobacco (BAT), and competitive pressure from global brands like Marlboro.

After the rate rationalisation meeting kicked off on Wednesday, brokerage firm Jefferies had said it believed the Council’s focus on revenue neutrality is a positive.

“Based on our industry interactions, we believe that the government intends to maintain revenue neutrality. This means that whatever head replaces the compensation cess, the overall tax burden on cigarettes may not change, which we would see as a relief for ITC,” analyst Vivek Maheshwari had said.

He had added that a stable taxation policy helps curb illicit cigarette trade, which had earlier flourished under steep tax hikes.

Jefferies cautioned that the balance between specific and ad valorem duties will be critical.

While specific duties are fixed per stick and do not rise with price hikes, ad valorem duties increase with retail prices, reducing ITC’s pricing power.

“Not only revenue neutrality is important, so is the share of specific and ad valorem,” the report said.

Despite being bullish on ITC’s long-term fundamentals, Jefferies expected the stock to remain range-bound until clarity emerges on the revised cess structure.

Pushback from industry

On the other hand, the tax hike is likely to trigger sharp responses from industry associations and analysts.

In December last year, when a 35% rate had been anticipated, the Swadeshi Jagran Manch (SJM) had called the proposal a “bad idea,” arguing it could fuel smuggling and lead to revenue losses for the country.

Other groups such as the All India Consumer Products Distributors Federation (AICPDF) and Indian Sellers Collective — an umbrella body of trade associations and sellers — had also raised concerns about the GST rationalisation plan.

For corporates like ITC, which derives over 80% of its net profit from cigarettes, higher taxes would become a major challenge. ITC noted in its annual report in FY24-25 that steep taxation has already encouraged the shift to illicit cigarettes and other lightly taxed tobacco products.

The FMCG sector is also expected to face similar pressures.

The Indian Beverage Association (IBA) has argued that a 40% levy on carbonated soft drinks discourages innovation and growth.

Separately, a study by the India Council for Research on International Economic Relations (ICRIER) observed that India’s carbonated beverages market, valued at $18.25 billion in 2022, continues to lag behind other developing nations like Thailand and the Philippines.

An ET Prime report by Nilanjan Banik, professor at the School of Management, Mahindra University last year had cautioned that raising GST rates on carbonated soft drinks and tobacco products disproportionately affects low- and middle-income households, as their budgets are more strained by higher costs.

“Low and middle-income households are likely to be hit harder, as higher taxes will strain their budgets more,” he wrote.

Meanwhile, the non-alcoholic beverages sector had urged the government to reduce GST on aerated drinks to 18%. Industry representatives argued that lower taxation would make these products more affordable, boost investments, and generate up to 1.2 lakh jobs annually by 2030.

Officials have defended the overhaul, saying it is designed to be a comprehensive and long-term solution rather than incremental tinkering.

“The proposed exercise aims to revamp and simplify the structure in a holistic and comprehensive way instead of a piecemeal exercise,” an official had told ET earlier.

These domestic tax reforms come on the heels of the Trump administration’s recently imposed sweeping 50% tariff on Indian goods, one of the highest on any trading partner. This measure, which took effect on August 27, 2025, was cited by US officials as a response to India's continued imports of Russian oil and its general "intransigence" in trade talks. The Centre’s move to overhaul the GST structure and boost domestic consumption is a direct strategic countermeasure to mitigate the economic fallout from the new tariffs.

The fitment committee under the GST Council, comprising officials from the Centre and the states, cleared the two-slab proposal on Tuesday, paving the way for its rollout in 2025.