The Federation of All India Distributors Associations (FAIDA) has written to the Finance Ministry seeking a fundamental change in how cigarettes are taxed under GST, sources told CNBC-TV18. The body suggested that the government should shift to a full tax-at-source mechanism — levying GST on the maximum retail price (MRP) upfront — to plug leakages and curb illicit sales, sources added.
According to sources, “the Finance Ministry is examining the representation and is likely to place the proposal before the GST Council at its meeting on September 3–4. Discussions may also extend to pan masala, another category prone to black marketing and under-invoicing.”
Proposed Mechanism
At present, GST is levied at multiple stages. The manufacturer pays GST on the distributor’s sale price, after which the distributor pays GST on the value addition while selling to wholesalers. The wholesaler, in turn, pays further tax on the margin earned when selling to retailers, and finally, the retailer pays the GST as well on the value addition at the point of sale to the end consumer.
This multi-layered structure, distributors argue, leaves scope for under-reporting and leakages at wholesale and retail levels, ultimately causing revenue loss to the government.
To address this, FAIDA has proposed that the government instead collect the entire tax upfront on the end-price MRP, ensuring there is no scope for evasion in the downstream supply chain.
Distributors’ Concerns
FAIDA’s representation highlights two key issues, starting with excessive compliance pressure. Distributors contend that they face repeated scrutiny from tax authorities despite sourcing all their purchases directly from companies in a fully transparent manner.
“We are being held responsible for post-sale leakages beyond our control. This is deeply unfair,” the representation said, according to sources.
After goods leave distributors’ hands, many wholesale and retail transactions are allegedly not billed properly, leading to revenue loss. Distributors claim they are unfairly blamed for these lapses despite adhering to compliance requirements.
What Next
FAIDA’s proposal, if accepted, would represent a significant departure from the current GST framework. It could help the government secure revenue upfront, while also reducing compliance burden on distributors. However, the shift to an MRP-based taxation system may require extensive deliberation within the Council, as well as inputs from both the industry and states.
The GST Council’s September 3–4 meeting is expected to take up the matter, with cigarettes and pan masala likely to be at the centre of discussions on curbing illicit sales and black marketing.
Commenting on the proposal, an tax expert said, “The proposed shift to a Maximum Retail Price (MRP) based taxation model for a certain sector could significantly boost tax collections and mitigate the scrutiny that companies currently face from the tax administration. This move has the potential to simplify the tax structure and bring greater clarity to an often-complex compliance landscape.
However, a critical aspect to monitor will be how this new framework accommodates the interests of the states. It’s plausible that the introduction of a separate State Excise on these products would be a mechanism to ensure their revenue streams remain stable, he cautioned.
Furthermore, the overall impact of these changes on the final price of the products will be a key factor to watch. It remains to be seen how the new tax regime balances the dual objectives of increasing government revenue while ensuring market stability and consumer affordability. The success of this transition will hinge on striking this balance, he said.
Established in 1996, FAIDA is a nationally registered apex body representing distributors across FMCG, food and beverages, mobiles, telecom, and cigarette trade in India. With 6 lakh members catering to nearly 3 crore retailers, FAIDA acts as one of the largest distributor networks in the country.
