Union Budget 2025: After missing it at GST meet, will FM hike sin tax in upcoming Budget? 

During the recent GST meeting, Union Finance Minister Nirmala Sitharaman did not make any significant decisions regarding sin tax. Earlier, the Group of Ministers (GoM) on GST rate rationalisation had previously suggested raising the tax rate on sin products like aerated beverages, cigarettes, tobacco, and similar items from 28% to 35%. This proposal has generated considerable discussion and is viewed as a vital measure to improve the GST system, increase revenue, and tackle public health issues.

Traditionally, governments implement a "sin tax" on products known to have detrimental effects on public health, such as alcohol and tobacco. This tax is imposed at higher rates with the dual purpose of discouraging consumption and generating revenue to support welfare programs.

In the fiscal year 2024-25 budget, Finance Minister Nirmala Sitharaman refrained from introducing any new sin tax policies. The previous year's budget, for 2023-24, had seen a slight increase in taxes on cigarettes. However, there were no changes to the tax rates on cigarettes in the FY25 budget; they remained the same.

In the FY24 budget, the Indian government raised the national calamity contingent duty (NCCD) by 15-16%. NCCD functions as a duty imposed on excise duty. Additionally, cigarettes and tobacco products, including pan masala and cigars, are subject to the highest Goods and Services Tax (GST) rate of 28%, whereas tobacco leaves are taxed at a lower rate of 5%.

One can describe ‘sin tax’ as a form of Pigovian tax intended to address negative externalities stemming from harmful business practices. The goal of Pigovian taxes is to reduce or eliminate the consumption of detrimental products by raising their prices, thus discouraging consumption and mitigating their detrimental effects on society and health. Common examples of products subject to sin taxes include tobacco, alcohol, narcotics, gambling, and high-sugar goods. The primary purposes of a sin tax are twofold — to discourage the consumption of harmful products by increasing their prices and to generate revenue for welfare programmes.

In December, a Group of Ministers (GoM) proposed implementing a special 35% tax rate on sin goods such as aerated beverages, cigarettes, tobacco, and similar products. If approved, this action is expected to result in price hikes for these products. Additionally, the introduction of a new sin tax could lead to further price increases for these items.