The Goods and Services Tax (GST) Council has approved a sweeping reform, moving from four slabs to a simplified two-slab system of 5% and 18%. A new 40% rate has been introduced specifically for sin and luxury goods, effective from September 22, 2025. Prime Minister Narendra Modi described the change as a “Diwali gift” during his Independence Day speech.
What’s in the 40% Club?
The Council has shifted several products from the earlier 28% slab to the newly created 40% GST rate. These include:
- Tobacco products: Pan masala, gutkha, cigarettes, chewing tobacco (such as zarda), unmanufactured tobacco, bidi, scented tobacco
- Cigars and cigar variants: Cigars, cheroots, cigarillos, and cigarettes of tobacco substitutes
- Sugary and flavoured drinks: Aerated waters with added sugar, carbonated soft drinks, caffeinated beverages, energy drinks
- Luxury and premium vehicles: Cars and SUVs with more than 1200cc petrol engines and 1500cc diesel engines
- Transportation sector: Select luxury/transport-related goods and services (to be detailed in upcoming HSN notifications)
- Imported/dutiable miscellaneous items: Certain high-end personal-use articles and goods earlier taxed at 28%
Alcohol remains outside GST and continues to be taxed separately by state excise duties.
Why a Sin Tax?
Sin taxes are levied on goods harmful to health or society, serving a dual purpose: discouraging consumption while generating revenue for public welfare. Cigarettes alone are estimated to drain over 1% of India’s GDP annually. Despite higher costs, demand for such products is relatively price inelastic, ensuring steady government revenue.
Impact on Industry and Consumers
For ITC and other tobacco giants, the restructured taxation is both a challenge and a relief. Analysts say the government’s focus on revenue neutrality ensures the overall tax burden may remain unchanged. However, trade groups warn that steep taxes could encourage illicit trade. The Indian Beverage Association also expressed concerns, stating that a 40% levy on aerated drinks may stifle innovation and disproportionately impact low- and middle-income households.
A Strategic Move Amid Global Trade Tensions
The overhaul also comes at a time when India faces a 50% tariff from the US on exports, citing trade disagreements and Russian oil imports. By streamlining GST and boosting domestic consumption, the government aims to cushion the impact of external trade pressures while ensuring long-term revenue stability.
