The government has announced a new measure to curb tax evasion in the tobacco industry. From April 1, 2024, manufacturers of pan masala, gutka and similar tobacco products will have to pay a penalty of up to Rs 1 lakh if they do not register their packing machines with the Goods and Services Tax (GST) authorities. The move is intended to prevent revenue leakage in the tobacco manufacturing sector, which has been under scrutiny for under-reporting production and sales.
Registration of packing machines
The Finance Bill, 2024, introduced amendments to the Central GST Act, where a penalty of Rs 1 lakh would be levied for every machine not registered. Further, such non-compliant machinery would face the risk of seizure and confiscation in certain cases.
Based on the recommendation of the GST Council, the tax authorities had last year notified a special procedure for registration of machines by tobacco manufacturers. The details of existing packing machines, newly-installed machines, along with the packing capacity of these machines, have to be furnished in Form GST SRM-I. However, there was no penalty notified for the same.
Revenue Secretary Sanjay Malhotra said the GST Council in an earlier meeting decided that for pan masala, gutka and similar products, there should be a registration of their machines so that they can keep a watch over their production capacity.
“However, there were no penalties in case they failed to register. So the Council had decided that there should be some penalties. That’s why in the Finance bill you find penalty up to a lakh of rupees for not registering machines,” Malhotra told PTI.
Change in compensation cess levy
In February last year, the GST Council, chaired by the Union finance minister and comprising state counterparts, had approved the report of a panel of state finance ministers on plugging tax evasion in pan masala and gutkha businesses.
The GoM (group of ministers) had recommended that the mechanism for levy of compensation cess on pan masala and chewing tobacco be changed from ad valorem to a specific rate-based levy to boost the first stage collection of the revenue.
Following that, the government had brought in amendments to Finance Bill, 2023, as per which the GST compensation cess would be levied on pan masala and other forms of tobacco on the highest rate of their retail sale price.
The change in levy mechanism was expected to increase revenue collection by about Rs 650 crore annually.
Impact on consumers and industry
The new penalty for non-registration of packing machines is likely to increase compliance costs for tobacco product manufacturers and may also lead to higher prices for consumers.
According to industry sources, there are about 10,000-12,000 packing machines used by tobacco product manufacturers across the country. The registration process involves submitting details such as machine identification number, location, capacity and ownership.
Some industry players have also raised concerns over the feasibility and effectiveness of the registration process, as they claim that it is easy to tamper with or replace the machines without informing the authorities.
The tobacco industry has been facing regulatory challenges and social stigma due to its adverse impact on health and environment. The government has also imposed high taxes and restrictions on tobacco products to discourage consumption and promote public health.
According to a report by Euromonitor International, India’s tobacco market is expected to decline by 2% annually in terms of volume sales between 2019 and 2024.