Why is Centre bringing back excise on tobacco after GST cess ends

The government said that tobacco products will continue to attract GST but will also be subject to additional excise duty on top of that tax from February 1

The central government has notified that additional excise duty on tobacco products and a new health cess on pan masala will take effect from February 1, making these items more expensive. This move is set to change how sin goods such as cigarettes, tobacco, and pan masala are taxed, as it replaces the goods and services tax (GST) compensation cess regime.

What’s the latest

The government on Wednesday notified that tobacco products will continue to attract GST but will also be subject to additional excise duty on top of that tax from February 1. Additionally, pan masala will face a new Health and National Security Cess.

   

The existing GST compensation cess, which had been levied on such goods to support state revenues after GST implementation, will cease to exist from February 1.

Why it matters

The move is significant because it allows the Centre greater control over the revenue generated from sin goods. The GST compensation cess was originally designed to protect state revenues when India shifted to the GST system. With the compensation period effectively over, the Centre is restructuring how it taxes high-revenue sin goods.

How were sin goods taxed earlier?

Under the GST system, sin goods such as cigarettes, tobacco, pan masala, and aerated drinks were taxed more heavily than normal products. Instead of just one tax, these items attracted two layers of tax. They were charged the highest GST rate of 28 per cent, along with an additional GST compensation cess.

 

This additional cess was introduced in 2017 to help states recover revenue losses after GST replaced older taxes like excise and Value Added Tax.

 

Given that the compensation period is now coming to an end, the Centre is changing how it taxes these sin goods by moving back to excise-style levies.

What changes now

According to the new tax regime, pan masala, cigarettes, tobacco and similar products will attract a GST rate of 40 per cent, while biris will attract 18 per cent Goods and Services Tax from February 1.

 

Additionally, the compensation cess will cease. However, it will be replaced by an additional excise and health cess as standalone duties outside the GST framework.

What’s driving the move

The shift allows the Centre to adjust sin taxes with more flexibility and reduces its obligation to share revenues with states under the GST model.

 

The move is also aimed at improving compliance, closing gaps that lead to revenue losses, and boosting tax collection from these sectors, which have long struggled with problems such as under-reporting and incorrect valuation.  

What’s next

Industry responses on pricing and potential cost pass-through are expected soon, as companies assess how the new duties may affect retail prices. States and businesses may also raise concerns about the tax shift, especially over revenue sharing and market impact.