The rate hike, analysts say, might hurt demand, which is already struggling due to slowing economic growth.
Uncertainty has arisen on whether the 35% GST slab proposed by the Group of Ministers is intended for luxury goods like luxury vehicles, motorcycles, and consumer durables or for sinful goods like cigarettes and carbonated drinks.
Analysts caution that the rate hike may hurt demand, which is already struggling due to the decreasing pace of economic expansion.
Cigarette manufacturers ITC and Godfrey Phillips' stock dropped due to concerns about increased GST rates, but both businesses claimed they had no idea why the stock was moving.
Cigarette manufacturers will suffer from the 35% GST rate increase.
ITC stated in its most recent annual report that while a stable tax system has resulted in buoyant tax collections, sharp tax rises have traditionally had a negative impact on both tax collections and the volume of legal cigarettes.
Revenue collections increased by just 4.7% between FY13 and FY17, despite taxes rising by 15.7% CAGR.
However, because there was no tax increase between July 2017 and March 2018, revenue collection increased by 10.8% between April 2018 and January 2020.
The last time the Center changed cigarette taxes was in the 2023 budget, when the National Calamity Contingent Fund (NCCD) saw a 16% boost.The stock saw a 1.02 percent decline at the end of trading.
The GoM has recommended increasing the tax rate on sin items, such as luxury automobiles, tobacco, and aerated drinks, from 28% to 35%, according to Priyanka Sachdeva, GST Partner-AMRG and Associates.
"The new 35 percent slab would be for'sin goods' only and not for luxury items as it would be against the spirit of GST and higher than the pre-GST rate," stated M.S. Mani, partner at Deloitte India. Since addiction is the reason for consumption, the tax increase is unlikely to have a major effect on the demand for "sin goods."
By rationalizing rates, the GoM's plan seems to aim for a revenue-neutral posture, balancing the expected revenue decrease from reductions in health and life insurance with the revenue rises from modifications on other products, according to Krishan Arora, partner at Grant Thornton Bharat.
In a statement, the Central Board of Indirect Taxes and Customs stated that the GoM is merely a body that makes recommendations. Changes to the GST rate have not yet been discussed by the GST Council. Thus, the reports are baseless.
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