Context:
- Parliament has approved the Central Excise (Amendment) Bill, 2025, enabling the Union government to levy excise duty on tobacco products once the existing GST compensation cess ends.
- The move ensures continuity in taxation of tobacco as a demerit good, balancing public health objectives and revenue considerations under the GST regime.
Key Highlights:
Legislative Approval
- The Lok Sabha passed the Bill, followed by approval and return by the Rajya Sabha.
- The Bill will come into force after the GST compensation cess on tobacco concludes, expected in December.
Taxation Framework Clarified
- The Finance Minister clarified that the overall tax burden on tobacco will remain at 40%, even after the compensation cess ends.
- Tobacco will continue to be taxed as a demerit good within the GST framework.
Rationale for the Bill
- The GST compensation cess was introduced to compensate states for revenue losses post-GST implementation and is now nearing its end.
- The amendment provides a legal and fiscal mechanism to impose central excise duty to avoid revenue gaps.
Policy Orientation
- Reinforces the government’s stance on discouraging consumption of harmful products like tobacco.
- Ensures predictability and stability in indirect tax policy.
Relevant Prelims Points:
- Issue: End of GST compensation cess on tobacco necessitating an alternative tax mechanism.
- Causes:
- Sunset clause of GST compensation framework
- Need to maintain high taxation on demerit goods
- Government Initiative:
- Central Excise (Amendment) Bill, 2025
- Benefits:
- Revenue continuity for the Centre
- Public health signaling through high taxation
- Challenges:
- Industry resistance
- Risk of illicit trade if taxes rise excessively
- Impact:
- Stability in tobacco taxation
- Continued discouragement of tobacco consumption
Relevant Mains Points:
- Facts & Definitions:
- Excise Duty: Tax on manufacture/production of goods
- GST Compensation Cess: Temporary levy to offset state revenue losses
- Demerit Goods: Goods harmful to society, taxed at higher rates
- Static Linkages:
- Indirect taxation under GST
- Fiscal federalism and compensation to states
- Conceptual Clarity:
- Sin taxes as tools for behavioural change
- Way Forward:
- Strengthen tobacco control policies alongside taxation
- Use additional revenue for public health expenditure
- Enhance enforcement to curb smuggling and tax evasion
UPSC Relevance (GS-wise):
- GS 2: Polity – Parliamentary legislation, fiscal powers
- GS 3: Economy – Taxation policy, demerit goods, GST framework
- Prelims: Excise duty, GST compensation cess, indirect taxes