GST Twist from Feb 2026: Pay Tax on MRP, Not Sale Price for Tobacco Goods
Understanding the Shift to MRP-Based Valuation
Effective February 1, 2026, the GST regime introduces a groundbreaking change for specified tobacco and tobacco-related products. Under the new Rule 31D of the CGST Rules, valuation shifts from the traditional transaction value to Retail Sale Price (RSP) or Maximum Retail Price (MRP) printed on the packaging. This applies to notified HSN codes including pan masala (2106 90 20), unmanufactured tobacco (2401), cigars and cigarettes (2402), and others up to products containing tobacco substitutes (2404 19 00).[1][2][4]
The core rationale is to curb under-valuation and tax evasion through discounts. No longer can sellers reduce GST liability by offering heavy discounts below MRP; tax is pegged to the MRP, treated as inclusive of GST.[1][3]
- Overrides Section 15 and Rules 27-31C for notified goods.
- GST rate hiked to 40% for many sin goods, replacing 28% plus compensation cess.[3][5][11]
- Aims for uniform taxation across the supply chain.[6]
Tax Calculation Formula and Worked Examples
The formula ensures tax reflects the maximum declared retail price. MRP is always deemed inclusive of GST.
Key Formulas
- Tax Amount = (MRP × GST Rate %) / (100 + GST Rate)[1][2][6]
- Deemed Taxable Value = MRP − Tax Amount[1][2]
Example 1: Basic RSP Computation (IGST @ 40%)
Assume 1,000 packs with MRP ₹100 each, Total RSP ₹1,00,000.
- Tax Amount = (1,00,000 × 40) / 140 = ₹28,571.43[1][2][4]
- Deemed Taxable Value = 1,00,000 − 28,571.43 = ₹71,428.57[1][2]
Example 2: With Discounts
Gross sale ₹80,000, discount ₹20,000, net sale ₹60,000. Despite discount, tax remains ₹28,571.43 based on RSP.[1][2]
- Taxable Value (reported): Actual net sale ₹60,000
- Tax Amount (reported): RSP-based ₹28,571.43
- Total Invoice Value: ₹88,571.43[1][2][4]
This setup neutralizes discount-driven evasion. Even if sold below MRP, GST is fixed on printed price.[3][7]
GSTR-1 Filing, Reporting, and Compliance Steps
GSTN Advisory dated January 23, 2026, clarifies reporting in GSTR-1, e-Invoice, e-Way Bill, and IFF to handle system validations.[2][4][6]
Reporting Protocol
- Report actual net sale value (commercial consideration) in Taxable Value field: e.g., ₹60,000.
- Report RSP-calculated tax in Tax Amount field: e.g., ₹28,571.43.
- Total Invoice Value = Taxable Value + Tax Amount: e.g., ₹88,571.43.
- Manually override auto-calculated tax fields as systems expect Taxable Value + Tax = Total.[1][2][4]
Practical Steps for Businesses
- Verify MRP accuracy on packaging to avoid penalties, short payments, or audit disputes.[8]
- Train accounting teams on manual edits in GST portal.
- Handle transitional stocks: Pre-Feb 2026 purchases sold post-date follow new rules on supply date.[3]
- Assess Rule 86B impact: Cash payment restrictions may not apply if upstream GST on MRP discharged.[7]
- Prepare for B2C sales: Retailers report transaction value, but embedded tax links to MRP.[3]
Non-compliance risks demands, interest, and penalties. Update ERP systems and consult CAs for seamless transition.[1][6]
Implications and Strategic Considerations
This overhaul boosts revenue, shifts margins to trade, and ends cess credits, potentially causing stranded credits.[5] Manufacturers face fixed tax loads; distributors gain predictability but must renegotiate terms.[3]
Legal challenges may arise over retrospective elements or system overrides. Businesses should issue trade circulars, review contracts, and explore price protections via credit notes under Section 34.[3]
Stay compliant: Self-assess RSP fields meticulously. This MRP anchor redefines tobacco GST, prioritizing declared prices over deals.[7]