The Goods and Services Tax (GST) Council, scheduled to meet on September 3 and 4, is likely to take up a proposal to amend the Central GST (CGST) Act to permit a higher ceiling on GST slab rates. The move, pushed by States and once enacted, would provided room to impose steeper taxes on luxury items and so-called “sin goods” such as high-end cars and tobacco products.

The Centre’s proposal, also endorsed by the Group of Ministers, proposes two basic rates, 5 per cent and 28 per cent, apart from maintaining special rates of 0 per cent, 0.25 per cent (non-industrial diamonds/precious stones) and 3 per cent (gold, silver etc) beside a special rate of 40 per cent on 5-7 items from the 28 per cent category. Official sources have maintained that tax incidence will be the same on high end and sin goods (tobacco, gutka, cigarettes) as before. At the same time, states seek the same for luxury goods and high-end items for which there is need to provide the flexibility in the highest slab rate. 

Legally, Section 9(1) of the CGST Act, 2017, caps the Centre’s levy at 20 per cent. State GST laws do the same, creating a combined ceiling of 40 per cent. In practice, however, the highest slab rate applied so far has been 28 per cent, with the burden on luxury and sin goods pushed higher through compensation cess. This cess ranges widely — from 1 per cent to as much as 204 per cent — resulting in effective tax rates well above 40 per cent on SUVs, aerated drinks and tobacco products.

Now, there are two issues. First, cess cannot be imposed under GST as according to the Constitution, it is non-sharable. Though the GST regime has Compensation Cess, it is for a specific purpose and that too through special law. Second, since tobacco and tobacco related products can be subjected to additional levy under Central Excise duty, there should not be any problem. However, for products such as high-end automobiles, there is a need for raising the cap to maintain incidence of tax. While the cess was originally introduced as a temporary measure to compensate states for revenue losses under GST, states such as West Bengal now argue that the practice is unsustainable. They argue that this arrangement creates a reliance on a temporary, special-purpose tax. They fear that once the cess is completely phased out, they will lose a vital source of revenue without a permanent solution.

Instead of continuing with a temporary arrangement, these states are proposing a more fundamental change to the GST structure. They want the maximum GST slab to be increased. Currently, the highest slab is 28 per cent, with the cess levied on top of this for certain items. By increasing the base slab itself (for example, to 40 per cent as a special rate), tax administration would get the flexibility to continue taxing luxury and sin goods at a higher rate. This would provide them with a permanent, stable source of revenue that is integrated directly into the GST framework, rather than a temporary cess that will eventually expire.

According to Krishan Arora, Partner, Grant Thornton Bharat, Parliament can amend the GST law to create a higher special category if required, but that would involve a legislative process and cannot be done by executive action alone. Further, he said that tobacco products are treated differently under indirect tax regime. Apart from GST and compensation cess, they are subject to central excise duty and the National Calamity Contingent Duty (NCCD), enabled by specific constitutional and statutory provisions, he said.

Ayush A Mehrotra, Partner at Khaitan & Co also said that if there is an intention to introduce a special category permitting rates above this ceiling, a statutory amendment to Section 9(1) (of CGST Act) would be necessary. Under the Constitution, the levy of Central Excise is expressly retained for certain goods specified in Union List Entry 84, such as petroleum products and tobacco. Accordingly, excise duty in addition to GST is constitutionally permissible for tobacco products, as evidenced by the continuing imposition of basic excise duty and NCCD.

“For goods other than those specified, the imposition of an additional excise duty would require an amendment to the constitutional framework established by the Constitution (One Hundred and First Amendment) Act, 2016,” he said.

Published on August 24, 2025