'Tobacco levy neither a new tax nor a cess': FM Nirmala Sitharaman

While the minister said the Centre had surrendered its power to levy excise duty on tobacco in 2017, excise duty did continue after GST - though at a nominal level

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The Lok Sabha on Wednesday passed the Central Excise (Amendment) Bill, 2025, with Finance Minister Nirmala Sitharaman emphasising that the proposal restored substantive excise duty on tobacco products that had been drastically reduced after the goods and services tax (GST) introduction, and “is neither a new levy nor a cess”. 

Assuring Parliament that the excise duty being restored on tobacco products will go into the divisible pool of taxes, the minister said: “Excise duty forms part of the divisible pool, and 41 per cent of the collections will go to states,” she said. Several members had termed the levy a cess, but Sitharaman clarified: “This is not a cess. It is excise duty. When there is a cess, I will stand up and say it is a cess. This is not one.” 

Moving the bill, Sitharaman said the Centre had surrendered its power to levy excise duty on tobacco and tobacco-related products in 2017 solely to enable the collection of the compensation cess during the first five years of GST. “That right was given away to the GST Council so that compensation cess could be collected on items taxed at 28 per cent. That cess was collected from 2017 till 2022 and transferred to the states,” she said. 

“With the sunset of compensation cess, what was conceded by the Centre in 2017 is naturally reverting to the Centre. This is not a new law, not an additional tax, and not something the Centre is taking away,” she told the House. Even during GST, the basic excise duty account head on cigarettes was kept nominal “just to keep the account alive”, the minister pointed out. “In practical terms, the excise per stick was a fraction of a paisa,” she said. 

Under the current regime, the excise duty on tobacco products is: ₹200-735 per 1,000 cigarettes, ₹1-2 per 1,000 bidis, 64 per cent on unmanufactured tobacco, and 25-100 per cent on chewing, snuff and jarda products. The new Bill raises these sharply to pre-GST-levels with cigarettes’ duty moving to ₹2,700-11,000 per 1,000 sticks, unmanufactured tobacco to 70 per cent and smoking mixtures to 325 per cent, with other levies for chewing and other tobacco products. 

Pre-GST excise rates, however, ranged between ₹1,585 and ₹2,850 per 100 sticks for non-filter cigarettes, and ₹1,585 to ₹4,170 per 100 sticks for filter cigarettes. “So pre-GST rates were far higher. During GST, compensation cess did the major job while excise remained only token,” she said. 

The compensation cess rates on cigarettes remained unchanged from July 2017 to 2024. Citing the WHO’s Global Tobacco Control Report, the minister said India did not revise specific cess rates even as retail prices rose much slower than income growth. As a result, cigarette affordability “either stagnated or increased in the past decade”, meaning prices did not rise in line with purchasing power. 

More than 80 countries revise tobacco taxes annually using inflation indexing or multi-year schedules, she noted, naming Australia, New Zealand, the Philippines, Turkey and South Africa. India also used to raise tobacco taxes annually before GST, she pointed out, adding that the country’s tax incidence on cigarettes is around 53 per cent, well below the WHO benchmark of 75 per cent.

Responding to concerns about tobacco farmers, Sitharaman said efforts to shift them away from tobacco cultivation have been ongoing for decades. Under the Rashtriya Krishi Vikas Yojana’s crop diversification programme, ten major tobacco-growing states — including Andhra Pradesh, Gujarat, Karnataka, Odisha, Tamil Nadu and Uttar Pradesh — have been covered since 2015-16. Between 2018 and 2021-22, 1.12 lakh acres or 45,325 hectares have switched from tobacco to crops such as sugarcane, groundnut, oil palm, cotton, chilli, maize, onion, pulses and turmeric. Telangana has encouraged a shift to bengal gram and chillies, Odisha to vegetables and maize, and Karnataka to soybean and sugarcane.