For Business Dealing In Notified Goods, Compliance Obligations Change Significantly From 01.02.2026 Under GST
Summary:From 01.02.2026, GST compliance for notified “sin” goods such as pan masala, tobacco, cigarettes and cigars undergoes a fundamental shift with the introduction of MRP/RSP-based valuation under new Rule 31D, a higher 40% GST rate, and the discontinuation of compensation cess. Rule 31D overrides transaction-value principles and mandates that GST be computed on the retail sale price printed on the package, treated as tax-inclusive, regardless of invoice price or trade discounts. This effectively neutralises undervaluation and discount-driven tax planning. Simultaneously, compensation cess is reduced to NIL, with revenue safeguarded through the higher GST rate and, for cigarettes, additional excise duty. For downstream traders, relief from the 1% cash payment requirement under Rule 86B is provided where tax is already discharged on MRP basis at the first stage. These changes require significant updates to product classification, ERP systems, billing logic, return reporting, and transitional stock handling, making advance preparation critical. Below is a structured practitioner‑oriented note.
1. New MRP/RSP‑based valuation – Rule 31D
A new Rule 31D has been inserted in the CGST Rules, 2017 via Notification No. 20/2025–Central Tax dated 31.12.2025, effective 01.02.2026. This introduces MRP (Retail Sale Price) based valuation for notified goods (mainly pan masala, tobacco, cigarettes and similar products) instead of transaction value under section 15.
Key features:
Overriding provision
Rule 31D starts with a non‑obstante clause overriding section 15 and Rules 27–31C for notified goods; valuation no longer depends on invoice price if those goods are covered.
Deemed value of supply
Value = Retail Sale Price (RSP/MRP) printed on package minus GST included in such price; RSP is treated as tax‑inclusive.
Reverse calculation formula (for a single composite rate):
GST amount = RSP x GST rate/(100 * GST rate).
Special situations
Multiple MRPs on same pack: highest MRP to be adopted.
Area‑wise MRP: adopt MRP applicable for that area.
Subsequent increase in MRP: higher revised MRP becomes valuation base even if printed later.
Coverage
Applied to “specified goods” notified by CBIC – pan masala, unmanufactured tobacco (other than tobacco leaves), cigarettes, cigars, other manufactured tobacco products and allied RSP‑declared products.
Example – manufacturer to distributor (cigars)
Product: Cigars, HSN 2402 – covered under Rule 31D.
Printed MRP on pouch: ₹1,280 (inclusive of GST).
Invoice price to distributor: ₹900.
GST rate notified: 28% (illustration from commentary).
Computation:
GST amount = 1,280 x 28/1-2B = t280.
Taxable value (exclusive of GST) = ₹1,280 − ₹280 = ₹1,000.
Compliance:
Manufacturer must charge GST on ₹1,000 (value) and ₹280 (GST) even though commercial price is ₹900; undervaluation via lower invoice value is neutralized.
Distributor gets ITC of ₹280, subject to normal conditions.
2. New 40% GST rate & end of compensation cess
CBIC has notified an upward revision of GST rate on tobacco, pan masala and related products, together with a NIL compensation cess rate, enforceable from 01.02.2026.
Key points:
40% GST rate on sin goods
For pan masala, gutkha, chewing tobacco, cigars, hookah tobacco and similar goods, GST is now at 40% from 01.02.2026 as per Central Tax (Rate) Notification No. 19/2025 (rate notification).
Beedis/Biris have been specifically reduced from 28% to 18% from the same date.
Compensation cess discontinued
Compensation cess on tobacco and pan masala is phased out by prescribing NIL cess rate from 01.02.2026.
Revenue loss is partly offset through higher base GST (40%) and a revamped excise regime.
Additional excise duty
For cigarettes, additional excise ranging roughly from ₹2,050 to ₹8,500 per 1,000 sticks has been notified depending on length, with effect from 01.02.2026.
Example – cigarettes with 40% GST
Product: Filter cigarettes, length 75 mm (covered under revised regime).
MRP per pack of 20 sticks: ₹300 (inclusive of all taxes).
Applicable GST: 40%.
Additional excise (say) ₹5,000 per 1,000 sticks = ₹100 per pack of 20.
If RSP‑based valuation applies:
GST amount = (say ₹86).
Taxable value under GST ≈ ₹214.
Excise duty = ₹100 per pack, levied separately under Central Excise; pricing must ensure that combined indirect tax burden fits within MRP.
3. Interaction with Rule 86B and cash payment condition
For traders (non‑manufacturers) dealing in goods covered under Rule 31D, a relaxation vis‑à‑vis Rule 86B (1% mandatory cash payment) has been provided.
Where the supplier (typically manufacturer/importer) has discharged GST on MRP/RSP basis under Rule 31D, the 1% minimum cash payment condition under Rule 86B will not apply to such downstream suppliers, subject to conditions notified.
Rationale: once tax is fully paid upfront on maximum retail price, risk of undervaluation and excessive credit is significantly reduced.
Example – wholesaler reselling pan masala
Manufacturer pays GST on MRP under Rule 31D at 40%.cleartax+1
Wholesaler’s turnover exceeds the threshold otherwise triggering Rule 86B.
If conditions in notification are satisfied, wholesaler may utilize ITC without 1% mandatory cash payment since tax was already discharged on RSP at the first stage.
4. Compliance changes for taxpayers from 01.02.2026
For businesses dealing in notified goods, compliance obligations change significantly from 01.02.2026.
Key action points:
Product classification and mapping
Identify SKUs falling under notified HSNs (pan masala, unmanufactured tobacco other than leaves, cigarettes, cigars, etc.).
Map these SKUs in ERP/billing software under “MRP‑based valuation – Rule 31D” category.
Master data & MRP controls
Ensure correct RSP/MRP is printed on packages and updated in master data; highest MRP to be adopted where multiple MRPs exist.
Set process for capturing area‑specific MRPs and ensuring correct MRP is used for valuation in that State/region.
Billing logic changes
Invoices must compute GST on RSP‑derived taxable value, not on commercial price or trade discounts, for covered goods.
Software must do reverse‑calculation of GST from MRP as per Rule 31D; any change in GST rate (e.g., from 28% to 40%) must be parameterized.
Return reporting (GSTR‑1 & 3B)
Taxable value in GSTR‑1 for these goods should match RSP‑based value, not invoice consideration, to avoid mismatch with portal validations and departmental analytics.
Separate HSN‑wise reporting is recommended so that Rule 31D‑covered supplies are clearly identifiable.
Transitional issues as on 01.02.2026
Stocks lying with distributors/retailers purchased prior to 01.02.2026 but sold thereafter must follow the rate and valuation in force on date of supply; this may require trade‑level circulars and margin renegotiations.
Assess whether any price‑protection / credit notes are needed for differential tax burden under section 34; such credit notes must keep in mind that base GST is now 40% with MRP valuation.
5. Illustrative compliance scenarios
A. Manufacturer giving heavy discount
Facts:
MRP on pan masala pouch: ₹10 per unit.
Trade invoice price to distributor: ₹7.
GST rate: 40%.
Computation under Rule 31D:
GST = (say ₹2.86 per pouch).
Taxable value = ₹7.14.
Implications:
Manufacturer must pay GST of ₹2.86 per pouch even if commercial price is ₹7; effective tax load is fixed with reference to RSP.
Discounting below RSP does not reduce GST burden; scheme design will shift more towards trade margins rather than base price manipulation.
B. Retailer selling below MRP
Facts:
Cigarette pack MRP: ₹300, GST 40%.
Retailer sells at ₹280 to consumer in competitive market.
Compliance:
At manufacturer level, GST already computed on MRP under Rule 31D; retailer’s outward supply is B2C and typically declared at transaction value (₹280) but tax incidence embedded is already linked to MRP.
No separate RSP‑reverse computation at retailer stage if he is not altering declared MRP; however, he must ensure invoicing/invoice‑cum‑cash memo still shows price inclusive of taxes and does not misrepresent RSP under Legal Metrology.
6. Practical commentary for practitioners
Policy intent
The combined move to 40% GST, MRP‑based valuation and end of compensation cess is aimed at plugging undervaluation and stabilizing revenue from sin goods while simplifying cess structure.
Litigation risk
Key areas where disputes can arise: identification of “specified goods”, correctness of RSP declaration, treatment of multiple MRPs, and transitional stock valuation.
Internal documentation of SKUs, MRPs, and valuation working should be maintained contemporaneously to defend assessments.
Advisory to clients
For manufacturers/importers: focus on system changes (billing, ERPs, pricing) before 01.02.2026 and align commercial contracts keeping MRP‑linked tax in mind.
For distributors/wholesalers: educate them on ITC position, Rule 86B relaxation and margin restructuring as GST is no longer directly driven by trade price.
Author Bio
