Parliament approves Bill to levy excise duty on tobacco

New Delhi: Parliament on Thursday approved a Bill to levy a higher excise duty on tobacco and related products once the GST compensation cess ends, with the Rajya Sabha returning the legislation to the Lok Sabha.

The Lok Sabha passed the Central Excise (Amendment) Bill, 2025, on Wednesday.

Replying to a discussion on the Bill in Rajya Sabha, Finance Minister Nirmala Sitharaman said this is not an additional tax, and the tax burden, as currently applicable under the GST regime, will continue.

She said that in the last GST Council, it was discussed in detail, and as was agreed earlier, that the compensation cess collection will probably come to a stop at the end of December.

“Let me assure here itself straight away that the tobacco products will still be taxed under the demerit category at 40 per cent in the GST frame of things. They will still be taxed at 40 per cent, but there will not be any compensation,” Sitharaman said.

The provisions of the Bill will come into effect once the GST compensation cess, which is currently levied on tobacco, comes to an end.

The cess will cease to exist after the Rs 2.69 lakh crore loan taken to compensate states for revenue loss during the Covid is repaid, which is likely to happen in the next couple of weeks.

Sitharaman said the items cannot be taxed beyond 40 per cent under the new GST changes, even if they are demerit goods.

“The incidence of tax on tobacco and tobacco-related products has therefore come down. You have no compensation. The highest rate that you have in GST is 40 per cent, and as a result, it gives the impression that the government has allowed a lesser tax on tobacco, and therefore, it’s going to become affordable. The intent is not that,” she said.

The finance minister said that within the GST scheme of things, it continues to be at the highest rate, but now that the compensation cess cannot be collected.

“We have to come back to the excise. The central excise act will now be back again,” she said.

Sitharaman also told the House that farmers are being encouraged to give up tobacco and grow other cash crops.

“This is being done in Andhra, Bihar, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal. In these states, more than 1 lakh acres of land are shifting from tobacco cultivation to other crops,” she said.

She also assured that tobacco products will still be taxed under the demerit category at 40 per cent in the GST regime.

“When GST was introduced, tax on tobacco and tobacco-related products -- even with the cess -- could not reach the benchmark set by WHO every year. As a result, the affordability index of tobacco products remains high, undermining public health goals.”

Later, the Bill was returned to the Lok Sabha by a voice vote.

The Bill, once enacted, will give the government the fiscal space to increase the rate of central excise duty on tobacco and related products after the GST compensation cess, which is currently levied on all tobacco products like cigarettes, chewing tobacco, cigars, hookah, zarda, and scented tobacco, ceases to exist.

Currently, a 28 per cent Goods and Services Tax (GST) plus cess at a varied rate is levied on tobacco and related products.

The Bill proposes to levy an excise duty of 60-70 per cent on unmanufactured tobacco. Excise on cigars and cheroots is proposed at 25 per cent or Rs 5,000 per 1,000 sticks, whichever is higher.

Cigarettes, depending on length and filter, are proposed to be taxed in the range of Rs 2,700-11,000 per 1,000 sticks, while chewing tobacco is taxed at Rs 100 per kg.