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Q.Source / Case Study based question. Read the following paragraph and answer the question given below : When the Goods and Services Tax (GST) was first introduced in 2017, it was considered a major tax reform in India since independence. It integrated several indirect taxes like excise, service tax and VAT into a single unified tax system. But with the passage of time, this tax system also needed to be changed. GST 1.0 included 5 major tax rates - 0%, 5%, 12%, 18% and 28% as well as additional cess on items such as luxury goods, tobacco and expensive cars. Though it was aimed at increasing revenue in an affordable manner, the GST 1.0 rates were criticised for being complex and putting an additional burden on small enterprises. Traders found it difficult to classify goods accurately, which often led to corrections and confusion. But GST 2.0 offers a streamlined tax system. The government has significantly reduced the number of rates and product categories for clarity. There are now rates of 0%, 5%, 18% and 40% for commodities. By eliminating the 12% rate and imposing a special higher rate of 40% on luxury goods, GST 2.0 removes ambiguity. It makes a clear distinction between necessities, simple and luxury goods. Essential items like butter, utensils, sewing machines and toothpaste will be cheaper. Now there will be no tax on rubber, notebooks, pencils, maps and health services. The new rates are effective from September 22, 2025. The revenue shortfall on account of rate cut will be around Rs. 93,000 crore but the revenue gain on luxury goods at the rate of 40% will be around Rs. 45,000 crore. Q: Why high tax rates are imposed on tobacco and luxury goods ?

Punjab PsebPSEB Punjab Class 12 (Commerce) 2026Subjective· 1mImportance★★★★★
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High taxes on tobacco/luxuries discourage their use and raise revenue.

High tax rates are placed on tobacco and luxury goods for two reasons: to discourage the consumption of harmful/demerit goods (like tobacco) and non-essential luxuries, and to raise additional government revenue from higher-income consumers who buy them (the passage notes the 40% luxury rate would yield about ₹45,000 crore). …

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