Sin Goods Likely to Face Higher GST Rates as Compensation Cess Nears End in 2026

As the GST compensation cess for sin goods like cigarettes, tobacco products, carbonated drinks, and luxury cars is set to expire in March 2026, the GST Council is evaluating options to avoid a reduction in their tax burden. Currently, these items are subject to a 28% GST slab, with an additional compensation cess ranging from 11% to 290%. Authorities are considering increasing the GST rates on these goods post-cess.

A Group of Ministers (GoM), chaired by Pankaj Chaudhary, is assessing how to handle the taxation of luxury and sin goods beyond 2026. The consensus so far is that these goods should not see reduced taxation, especially given the expected revenue losses if GST rates on essential items like pharmaceuticals are reduced, potentially shifting from 12% to 5%, which could result in an estimated revenue loss of ₹11,000 crore.

Insurance Premiums and GST Slabs Under Review

The GoM on insurance products, scheduled to meet on October 19, 2024, is considering whether to exempt term insurance from tax and reduce the 18% GST on health insurance. However, concerns remain about the disruption of input tax credit (ITC) flow with total exemptions. Meanwhile, the GoM on rate rationalization, set to meet on October 20, 2024, will discuss the possibility of merging GST slabs, including the 5% and 12% slabs, though some states oppose this move due to revenue concerns.

Key Takeaways:

Sin goods such as cigarettes and luxury cars may see higher GST rates after the compensation cess ends in 2026.

The GoM is reviewing whether to maintain or increase taxes on these items to offset revenue losses from reducing GST on essential goods.

Upcoming GoM meetings will explore changes in insurance product taxation and the possible merging of GST slabs, with final decisions pending GST Council approval.

This process will ultimately shape the future taxation landscape, balancing revenue needs with fair tax structures across essential and luxury items.

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