Centre revamps tobacco taxation, brings back excise and resets GST rates from Feb 1, 2026

The Centre has notified a sweeping overhaul of tobacco taxation and regulation, bringing back a strengthened central excise framework alongside major changes in the Goods and Services Tax (GST) regime, with all measures set to come into force from February 1, 2026.

The Finance Ministry has notified February 1, 2026, as the date on which the Central Excise (Amendment) Act, 2025, will take effect. The move formally revives excise provisions for specified tobacco products, even as GST continues to apply.

Under the new rules, the government has notified chewing tobacco, jarda scented tobacco and gutkha, when manufactured with the aid of packing machines and packed in pouches, under Section 3A of the Central Excise Act. This brings these products under a machine-capacity-based excise duty system, where tax liability is determined by the number, speed and capacity of packing machines and the retail sale price (RSP), rather than declared production.

The framework introduces the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines Rules, 2026. Under these rules, manufacturers must register and declare all packing machines, with excise duty payable on a monthly basis and required to be deposited by the 6th day of each month. The rules are aimed at plugging evasion by linking tax directly to installed manufacturing capacity.

Alongside excise changes, the government has issued a set of GST notifications restructuring indirect tax rates on tobacco products. Under Notification No. 19/2025–Central Tax (Rate), and corresponding IGST and UTGST notifications, the existing 28% GST slab (Schedule VII) for tobacco products has been completely omitted. Tobacco items have now been redistributed between 18% GST (Schedule II) and 40% GST (Schedule III), depending on classification.

In another significant move, Notification No. 03/2025–Compensation Cess (Rate) reduces the GST compensation cess on all tobacco products to nil, eliminating an additional tax layer that had existed over and above GST.

Further, Notification No. 20/2025–Central Tax introduces a new MRP-based valuation mechanism for GST. For chewing tobacco, filter khaini, jarda scented tobacco and gutkha, GST will now be calculated based on the retail sale price declared on the package, aligning GST valuation with the excise duty framework.

Separately, the government has also notified that provisions of the Health Security-cum-National Security Act, 2025 will come into force from February 1, 2026, adding a wider regulatory dimension to tobacco oversight.

Taken together, the changes mark a fundamental reset of tobacco taxation, combining machine-based excise, MRP-linked GST valuation, restructured GST rates and zero compensation cess, as the Centre tightens compliance and seeks to curb long-standing tax evasion in the sector.