Excise duty on tobacco, health cess on pan masala from February 1

From February 2026, India replaces GST compensation cess with excise and health cess on tobacco and pan masala, introducing capacity-based duties and higher cigarette taxes

Tobacco products and pan masala will attract additional central excise duty and Health Security se National Security Cess, respectively, with effect from February 1, the Ministry of Finance said in a series of notifications issued late on Wednesday. 

These levies — approved by Parliament last month — will be over and above the 40 per cent goods and services tax (GST) applicable to such goods, with the exception of bidis, which fall under the 18 per cent slab. This marks a shift from the earlier regime under which compensation cess was imposed on these demerit products under GST. 

The government has introduced a new capacity-based duty regime for chewing tobacco, jarda-scented tobacco, and gutkha, and has also revised duty rates for other tobacco products such as cigarettes.

   

The core change is the notification of the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026. 

Under the new framework, excise duty will no longer be linked to the actual quantity produced. Instead, liability will be determined based on the installed production capacity of packing machines in a factory. Duty will be calculated using a formula that factors in the machine’s maximum rated speed — measured in pouches per minute — and the retail sale price (RSP) of the product. 

In a separate notification, the government has revised excise duty rates for cigarettes and other manufactured tobacco products. Non-filter cigarettes not exceeding 65 millimetres will now attract a duty of ₹2,050 per 1,000 sticks, while those between 65 and 70 millimetres will be charged ₹3,600. For filter cigarettes, duties have been recalibrated across length categories, ranging from ₹2,100 per 1,000 sticks for those not exceeding 65 millimetres to ₹8,500 per 1,000 sticks for other filter cigarettes. Cigarettes made from tobacco substitutes will attract a duty of ₹4,006 per 1,000 sticks. 

Other revisions include a steep 279 per cent ad valorem duty on smoking mixtures for pipes and cigarettes, 60.5 per cent on homogenised or reconstituted tobacco, and 82 per cent on chewing tobacco. 

For manufacturers of chewing tobacco, jarda, and gutkha, the new rules impose a rigorous compliance regime. They must file a detailed declaration of all packing machines — certified by a chartered engineer — on the official portal by February 7, or within seven days of commencing production. These declarations will be subject to verification by excise officers, including factory inspections. 

The rules also mandate the installation of functional CCTV surveillance systems covering all packing areas, with recorded footage to be preserved for 48 months and made available to authorities on request. Any modification, addition, or removal of machinery will require prior intimation and may trigger a reassessment of duty liability. 

In a significant change to input tax credit rules, manufacturers will be allowed to claim CENVAT (central value added tax) credit only on duty paid on bulk packs of the notified goods used as inputs. No credit will be available for other raw materials or capital goods. The rules further state that these goods cannot be exported without payment of duty, and duty-free procurement of inputs for export production will not be permitted. 

Besides, a health cess will be levied based on the installed production capacity of pan masala manufacturing units. The levy is intended to create a “dedicated and predictable resource stream” for key national priorities such as health and national security, Finance Minister Nirmala Sitharaman told Parliament last month. 

Proceeds from excise duty will be shared with states in line with the Finance Commission’s recommendations. Central tax revenues form part of the divisible pool, of which 41 per cent is shared with states. According to a finance ministry official, while cess proceeds are not shareable, states will still benefit through increased spending on public health and national security programmes. 

“When the GST compensation cess on cigarettes was ending, a portion of that burden was shifted within GST by increasing the rate on cigarettes and pan masala from 28 per cent to 40 per cent. This higher GST rate now flows through the regular GST channel, of which states receive approximately 70 per cent. In effect, part of the compensation cess base has been moved into GST, enhancing the states’ share,” the official said. 

Saurabh Agarwal, partner with EY, said there is a likelihood of a sophisticated structural shift in India’s indirect tax architecture from this new year by way of transitioning from the GST compensation cess to a more permanent framework by operationalisation of the Health Security and National Security Cess and the Central Excise (Amendment) Act. “The government has provided much-needed long-term fiscal clarity for future,” Agarwal said. 

From an industry perspective, the move towards RSP-based valuation and a capacity-linked, rule-based excise framework represents a significant reform, he said, adding that the shift fundamentally addresses tax leakage challenges in the supply chain that were difficult to administer earlier. “By decoupling tax liability from declared transaction value and linking it to objective retail pricing and manufacturing capacity, the government is effectively broadening the tax base. This ensures that the entire value chain is taxed transparently,” he said. 

Reconsider hike: TII 

In a statement, industry body Tobacco Institute of India (TII) urged the government to review the computations behind what it described as an “extremely severe tax increase” and reconsider the scale of the hike, citing its far-reaching implications. The move, it said, would cause hardship and losses for millions of farmers, MSMEs, retailers, and local value chains, while providing a major boost to the illicit trade and harming legitimate domestic enterprises. 

The industry body also pointed out that for every three legal cigarettes sold in India, one illicit or smuggled cigarette is consumed, warning that the sharp tax increase would further fuel illegal activity, deprive the exchequer of revenue, and promote anti-social behaviour. 

(With inputs from Sharleen D'Souza)