New Tobacco Taxation Regime Takes Effect from February 1
India's taxation landscape for tobacco products is undergoing a significant transformation with the implementation of new excise duties and health cess from February 1. This comprehensive overhaul replaces the existing Goods and Services Tax (GST) structure that has governed these products since the nationwide GST rollout on July 1, 2017.
Revised Cigarette Taxation Structure
The Central Excise Act has been amended to introduce a tiered excise duty system for cigarettes, with rates varying based on length and type. This additional duty applies over and above the highest GST rate of 40 percent.
The new cigarette duty structure includes:
- Short non-filter cigarettes (up to 65 mm): ₹2.05 per stick
- Short filter cigarettes (up to 65 mm): ₹2.10 per stick
- Medium-length cigarettes (65-70 mm): ₹3.6-4 per stick
- Long, premium cigarettes (70-75 mm): ₹5.4 per stick
- Non-standard cigarette designs: ₹8.50 per stick
It's important to note that the highest duty of ₹8.50 per stick applies primarily to unusual or non-standard cigarette designs, with most popular cigarette brands falling under lower tax slabs.
Pan Masala and Other Tobacco Products
The Health and National Security Cess Act introduces a cess on the manufacturing capacity of pan masala units. Despite the new levy, the total tax incidence on pan masala will remain at the current level of 88 percent after accounting for the 40 percent GST.
Other tobacco products face revised taxation as well:
- Chewing and jarda scented tobacco: 82 percent excise duty
- Gutkha: 91 percent excise duty
New Regulatory Framework
From February 1, a new MRP-based valuation mechanism will be implemented for tobacco products including chewing tobacco, filter khaini, jarda scented tobacco, and gutkha. Under this system, GST will be determined based on the retail sale price declared on product packaging.
Manufacturers face additional compliance requirements:
- Pan masala manufacturers must apply for new registration under the Health and National Security Cess Law
- All manufacturers must install functional CCTV systems covering all packing machines
- CCTV footage must be preserved for at least 24 months
- Manufacturers must disclose machine numbers and capacities to excise authorities
- Abatement in excise duty available for machines non-functional for minimum 15 consecutive days
Revenue Distribution and GST Council Decisions
The proceeds from excise duty on tobacco products will be redistributed among states according to Finance Commission recommendations. Since the Centre's tax revenues form part of the divisible pool, 41 percent will be shared with states.
Similarly, proceeds from the pan masala manufacturing capacity cess will be shared with states through health awareness programs and other health-related schemes.
These taxation changes received parliamentary approval in December, following the GST Council's September 2025 decision to establish a new mechanism for levying cess and excise duty on these products. The GST Council, comprising finance ministers from both Centre and states, determined that the compensation cess would cease after repayment of loans taken to compensate states for GST revenue losses during the COVID-19 pandemic.
The ₹2.69 lakh crore loan, originally scheduled for repayment by January 31, 2026, necessitated this transition from the compensation cess system that began with GST implementation in 2017. Initially established for five years until June 30, 2022, the compensation cess was later extended by four years until March 31, 2026, specifically to facilitate repayment of COVID-related compensation loans.
This comprehensive tax restructuring represents a significant shift in India's approach to tobacco taxation, balancing revenue generation with public health considerations while ensuring states continue to receive their share of tax proceeds.
