Tobacco tax regime from February 1: Excise duty, health cess replace GST compensation levy

From February 1, cigarettes, pan masala and other tobacco products will come under a new, tougher tax regime, with the Centre introducing additional excise duties and a health and national security cess over and above the highest 40% GST slab. The move marks the most significant overhaul of taxation on so-called “sin goods” since the rollout of the Goods and Services Tax (GST) in July 2017.

The new levies will replace the existing structure of 28% GST plus compensation cess that has applied to cigarettes and tobacco products for nearly nine years. With the GST compensation cess set to end after repayment of Covid-era loans to states, the Centre has opted for a fresh framework that relies on excise duties and a dedicated cess to maintain revenue flows while aligning taxation more closely with public health objectives.

Key changes

A key change effective February 1 is the introduction of an MRP-based valuation system for tobacco products such as chewing tobacco, filter khaini, jarda-scented tobacco and gutkha. Under this mechanism, GST will be calculated based on the retail sale price declared on the package, rather than transaction value, tightening compliance and limiting under-reporting.

Under the revised framework, excise duty will be charged per 1,000 cigarettes, with rates linked to whether the product is filtered and its length. As per the notification, unfiltered cigarettes under 65 mm will attract a duty of Rs 2,050 per 1,000 sticks, while filtered cigarettes in the 70–75 mm category will be taxed at Rs 5,400 per 1,000 sticks. Longer or non-standard premium variants will face higher levies, rising up to Rs 8,500 per 1,000 sticks.

Pan masala

Pan masala manufacturers will also face stricter regulatory requirements. From February 1, they must obtain fresh registration under the Health and National Security Cess law, install functional CCTV cameras covering all packing machines, and retain footage for at least 24 months. Manufacturers will be required to disclose the number and capacity of packing machines to excise authorities, though provisions for abatement are available if a machine remains non-functional for at least 15 consecutive days.

Cigarettes

For cigarettes, the Central Excise Act has been amended to impose an additional excise duty ranging from RS 2.05 to Rs 8.50 per stick, depending on length and type. Short non-filter cigarettes of up to 65 mm will attract an additional duty of about Rs 2.05 per stick, while short filter cigarettes will face a levy of around Rs 2.10 per stick. Medium-length cigarettes (65–70 mm) will be taxed at roughly Rs 3.6–4 per stick, and longer premium cigarettes (70–75 mm) at about Rs 5.4 per stick. The highest duty of Rs 8.50 per stick applies to non-standard or unusual cigarette designs, a category that does not cover most popular brands.

Chewing tobacco and jarda

Chewing tobacco and jarda-scented tobacco will attract an excise duty of 82%, while gutkha will be taxed at 91%. For pan masala, the health and national security cess will be levied based on manufacturing capacity, with the government maintaining the overall tax incidence at the current level of around 88% after accounting for 40% GST.

Excise burden

Rating agency Crisil has warned that the additional excise burden is likely to lead to a 6–8% contraction in cigarette volumes in the next financial year, reflecting price sensitivity and declining consumption.

The Centre has emphasised that revenues from excise duty on tobacco products will form part of the divisible pool, with 41% shared with states as per Finance Commission recommendations. Proceeds from the health cess on pan masala manufacturing capacity will also be channelled to states through health awareness and related programmes.

Finance Minister Nirmala Sitharaman has said the objective of the cess is to create a “dedicated and predictable resource stream” for health and national security. The levy was approved by Parliament in December, following a GST Council decision in September 2025 to introduce excise and cess once the compensation cess mechanism ended. The Rs 2.69 lakh crore loan taken by the Centre to compensate states for GST revenue losses during Covid is set to be fully repaid by January 31, 2026.

India’s tobacco taxes had remained unchanged for seven years after GST, a sharp contrast to global best practices. According to World Bank estimates, India’s total tax incidence on cigarettes is around 53% of the retail price—well below the World Health Organization’s recommended benchmark of 75% or more. Countries such as the UK and Australia tax cigarettes at 80–85%, while several middle-income economies have sharply raised tobacco taxes over the past decade.

The new tax framework signals a renewed push to align India’s tobacco taxation with public health goals, while ensuring revenue stability in the post-compensation cess era.