New tobacco excise duty rules: What changes, what stays, price impact

Before the latest notification, cigarettes and other tobacco products were taxed under a layered structure combining GST with multiple cesses, including a compensation levy

The government on Wednesday notified a new tax structure for tobacco and pan masala products, set to take effect from February 1, 2026. 

 

The Centre said it has replaced the existing GST compensation cess with a new excise duty and cess, to be levied under the excise framework. It also clarified that the earlier compensation cess would no longer apply, while other statutory duties would continue unless expressly amended. 

 

Notably, National Calamity Contingent Duty (NCCD) was not altered, which means it would continue at existing rates.

What was the earlier tax structure?

Earlier, cigarettes and other tobacco products were taxed under a layered framework that combined GST with multiple levies. 

   

Cigarettes attracted 28 per cent GST, along with a GST compensation cess, which was split into two parts.

 

A specific cess ranged between ₹2,076 and ₹4,170 per 1,000 sticks, while an ad valorem (according to value) cess varied between 5 per cent and 36 per cent, which largely depended on cigarette length and retail price.

 

In addition, NCCD of ₹510 to ₹850 per 1,000 sticks were applied.

 

Put together, this structure translated into a tax incidence of roughly 50 per cent to 60 per cent of the maximum retail price (MRP), with longer cigarettes bearing a higher absolute burden but enjoying better pricing power.

 

It is to be noted that the government had flagged higher taxation on cigarettes as early as September 2025.

What the new tax structure entails

Under the notified framework, cigarettes will face:

• GST at 40 per cent
• A new excise duty ranging from ₹2,150 to ₹8,500 per 1,000 sticks
• NCCD remaining unchanged

 

While the government described the step as a replacement of the compensation cess, the upper end of the new excise duty exceeded the earlier combined cess structure, especially for longer cigarette categories.

Why cigarette length matters more than before

Cigarette taxation in India has always been sensitive to stick length, and the new structure deepened that distinction.

 

Longer cigarettes, which already attracted higher ad valorem cess earlier, now faces much higher absolute excise duties per 1,000 sticks.

 

Shorter sticks, while taxed less in absolute terms, will see a sharper proportional rise because of the higher GST applied uniformly.

 

In effect, the new framework will tighten the pressure across categories, but longer cigarettes are likely to face the steepest increase in rupee terms.

Old vs new: What the math suggests

Based on notified ranges, the estimated impact is as follows: 

Metric	Earlier structure	New structure (estimated)
GST rate	28%	40%
Fixed levy per 1,000 sticks	₹2,586 – ₹5,020* (approx)	₹2,660 – ₹9,350* (approx)
Tax as % of MRP	~50% – 60%	~65% – 80%
Increase in tax per stick	—	~20% – 40%

 

*Includes cess/excise plus NCCD

How this will effect cigarette prices

Initial estimates suggest tax per stick will rise by 20 per cent to 40 per cent, depending on length and price band. To pass this on fully, companies may need to raise prices by around 18 per cent to 35 per cent.

 

A brokerage assessment firm told CNBC TV 18 that ITC alone may need to raise prices by at least 15 per cent, if not more, to absorb the overall impact.

 

For example, if we take a cigarette packet priced at ₹100 with 10 sticks of regular size (68–70 mm), the new tax structure implies an estimated price increase of ₹15–₹25 per pack, taking the revised MRP to roughly ₹115–₹125. This means the per-stick price would increase by ₹1.5–₹2.5 (minimum). 

 

This estimate purely depends on how much of the tax increase companies choose to pass on.

 

Brokerages have flagged that a minimum 15 per cent hike is likely even for shorter cigarettes, with steeper increases for longer sticks. Without price hikes, the new structure could cut earnings before interest and taxes by over 40 per cent, while higher prices could pressure volumes, particularly in the mass segment.