Extra excise duty on tobacco products, cess on pan masala to take effect February 1

New Delhi: The Union government has overhauled the taxation framework for cigarettes, pan masala and other tobacco products, introducing higher excise duties and a new cess regime from February 1 in a move officials say is aimed at correcting distortions that emerged after the introduction of the goods and services tax and restoring both revenue and public health objectives of tobacco taxation.

Under amendments notified by the Finance Ministry to the Central Excise Act, cigarettes will attract an additional excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on length and category, over and above a higher GST rate of 40 per cent. The steepest increase has been imposed on longer, premium cigarettes, while unusual or non-standard designs will fall under the highest slab of Rs 8,500 per 1,000 sticks, a category officials said applies to very few products. 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 of the same length will be charged around Rs 2.10 per stick. Medium-length cigarettes between 65 mm and 70 mm will face an additional levy of roughly Rs 3.6 to Rs 4 per stick, and long cigarettes of 70 mm to 75 mm around Rs 5.4 per stick. Biris will continue to be taxed at 18 per cent GST.

Chewing tobacco and jarda scented tobacco will attract an excise duty of 82 percent, while gutkha will be taxed at 91 per cent. From February 1, all tobacco products, including pan masala and cigarettes, will be subject to 40 per cent GST along with excise duty and cess, replacing the existing structure of 28 per cent GST plus a compensation cess.

Alongside the excise changes, the ministry has notified the Health and National Security Cess Act, introducing a cess on the manufacturing capacity of pan masala and related smokeless tobacco businesses. Despite the new levy, officials said the overall tax incidence on pan masala will be retained at 88 per cent after accounting for GST, ensuring there is no reduction in the total tax burden following the winding down of the GST compensation cess. The government has also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines Rules, 2025, tightening compliance for manufacturers in these sectors. From February 1, producers will be required to install functional CCTV systems covering all packing machines and preserve footage for at least 24 months. They must declare the number and capacity of machines to excise authorities and may claim abatement of duty if a machine remains non-functional for a minimum of 15 consecutive days.

Explaining the rationale, government sources said the revised structure addresses a long period of stagnation in excise duties after GST was introduced in July 2017. Before GST, basic excise duty on cigarettes ranged between Rs 1,585 and Rs 4,170 per 100 sticks and was periodically revised to reflect inflation, rising incomes and healthcare costs. Post GST, basic excise duty remained at just Rs 5 to Rs 10 per 1,000 sticks for seven years, amounting to a fraction of a paisa per cigarette, while the compensation cess also remained unchanged.

As a result, officials said cigarette affordability increased, running counter to global public health guidance that recommends regular tax increases so prices rise faster than incomes. World Bank estimates place India’s total tax incidence on cigarettes at around 53 per cent of the retail price, well below the World Health Organisation benchmark of at least 75 per cent. By contrast, countries such as the United Kingdom and Australia tax cigarettes at over 80 to 85 per cent of retail price, while France, New Zealand and several European Union members exceed 75 to 80 per cent. Middle-income economies including Turkey, South Africa, the Philippines and Chile have also raised tobacco taxes to levels close to or above the WHO benchmark over the past decade. Government officials said the revised Indian framework remains balanced and aligned with international practice, rejecting claims that higher taxes fuel smuggling. “Global evidence shows illicit trade is driven mainly by enforcement gaps and supply chain weaknesses, not tax levels,” one official said.

The changes also follow the decision to sunset the GST compensation cess once loans taken to compensate states for revenue losses during the Covid period are repaid. The Centre had borrowed Rs 2.69 lakh crore for this purpose, with repayment scheduled to be completed by January 31, 2026. The compensation cess, initially introduced in 2017 for five years and later extended to March 31, 2026, will cease thereafter, prompting the GST Council in September to approve a new mechanism to levy excise duty and cess on demerit goods over and above GST.

Officials said the capacity-based cess on pan masala and smokeless tobacco addresses chronic evasion in machine driven industries. Past enforcement experience revealed under-reporting of output, undeclared machines and manipulation of retail sale prices and packet weights. The new system links levy to machine speed and grammage or retail sale price, providing what officials described as an objective and tamper-resistant proxy for production potential. GST will capture the value of sales, while the cess will reflect production capacity, with mismatches serving as red flags for evasion.

The cess has also been justified on health and security grounds. Officials pointed to the strong association between pan masala consumption and oral cancers, its high addictiveness and low unit price, and the burden of treatment costs on public hospitals. The Health Security cum National Security Cess, approved by Parliament last month under Article 270 of the Constitution, is intended to create a stable, non-lapsable funding stream for health and security needs without burdening essential goods.

With effect from February 1, 2026, the coordinated changes across excise, GST and the new cess are expected to establish a more durable tax framework for tobacco and related products, restoring the role of taxation as a public health tool while strengthening revenues for priority spending.