Explained: How tax regime on tobacco has changed in India since 2014

As the Centre scraps the GST compensation cess, here is how India's tobacco tax structure has evolved over the past decade

The Centre on Wednesday (December 31) formally notified a new tax framework for tobacco, replacing the goods and services tax (GST) compensation cess with a health and national security cess, which will be in force from February 1. The order also withdraws the compensation cess on tobacco products from the same date, bringing cigarettes and other tobacco items under a revised regime that combines a new excise duty and cess to be levied under the excise law. It clarified that the compensation cess will cease to apply, while all other statutory levies will remain in force unless specifically revised.

 

The change is part of a broader restructuring of indirect taxes on so-called ‘sin goods’, with the government signalling that the overall tax incidence on tobacco will be kept broadly unchanged even as the compensation cess, introduced at the time of the GST rollout, is phased out after serving its purpose.  Industry body Tobacco Institute of India (TII) criticised the move, saying it was “shocked and surprised” by what it described as an unprecedented increase in duty, arguing that it ran counter to repeated government assurances that the transition would be revenue neutral. In a statement issued on January 1, TII said the higher levies would hurt farmers, MSMEs, retailers and local value chains, while boosting illicit trade and smuggling, which it said already accounted for one in every four cigarettes sold in the country. "Such a massive increase will cause immense hardship and loss to millions of farmers, MSMEs, retailers and local value chains nurtured by the Industry, besides providing a huge fillip to Illicit Industry and damaging national enterprises," TII said.

   

How has taxation on tobacco evolved since 2014? 

In the pre-GST era, more specifically in the 2014-17 period, the taxes on tobacco comprised a complex system, which included Basic Excise Duty (BED), Additional Excise Duty (health cess), and National Calamity Contingent Duty (NCCD), varying by cigarette length and type. A major hike occurred in 2014-15, with BED increases up to 72 per cent for longer cigarettes, followed by smaller adjustments like 6 per cent in 2017. Bidis faced lower specific duties, such as Rs 21 per thousand sticks.

 

Between 2014 and 2016, successive budgets continued to nudge tax incidence upwards by combining specific and ad-valorem excise levies and by widening the range of products subject to higher surtaxes.

 

GST introduction and change in taxes on tobacco products 

When the GST replaced multiple indirect levies on July 1, 2017, tobacco was an exception. It remained subject to special extra levies. The GST Council placed most tobacco products in the highest GST slab (28 per cent) but overlaid that with a compensation cess intended to protect states’ revenues for the GST transition period. The cess structure was steep, as for many tobacco products, it translated into very large ad-valorem or specific levies on top of the 28 per cent GST (specific rates like ₹2,076-4,170 per thousand sticks plus 5-36 per cent ad valorem). The council estimated that the additional cess would yield substantial revenue in the early months of GST rollout.

 

Two features of the new design mattered. First, the compensation cess made the effective tax incidence on many tobacco products far higher than the published GST rate. Second, tobacco remained a centrally sensitive “sin good” whose tax treatment was kept outside the standard, simplified GST architecture.

 

Post-GST initial adjustments (2018-2024) 

After GST, most adjustments were not to the GST slab but to the compensation cess structure and to central excise, where it still applied. The Centre and the GST Council periodically adjusted specific cess amounts and rates for various forms of tobacco, including unmanufactured tobacco, bidis, pan masala and different cigarette lengths, citing both revenue and public-health considerations. For example, in 2017-18, the cess schedule included large ad-valorem rates and specific rupee-per-1,000-sticks levies for certain cigarette categories.

 

Eventually, NCCD hikes included 13 per cent in one budget and 16 per cent in 2023, with no change in 2024. Cess rates stayed largely static since 2017, keeping total incidence around 53 per cent, including other levies.

 

2025 reforms 

Last year marked a clear policy shift in the taxation of tobacco. The Centre and the GST Council signalled a reset of sin-goods taxation, placing tobacco products at the centre of the overhaul. In September, the council proposed moving cigarettes, pan masala and related products to a 40 per cent GST rate, up from 28 per cent, alongside plans to withdraw the GST compensation cess and replace it with a new health and national security cess and higher central excise duties.

 

At its 56th meeting, the GST Council approved the creation of a 40 per cent sin-goods slab for cigarettes, pan masala and similar products, while lowering the GST rate on bidis to 18 per cent. The new structure is to take effect from February 1, 2026, coinciding with the phase-out of the compensation cess. Separately, the Central Excise (Amendment) Act, 2025, sharply raised excise duties, with rates on cigarettes increased to a range of Rs 2,700-11,000 per thousand sticks from Rs 200-735 earlier, chewing tobacco taxed at 100 per cent, and hookah products at 40 per cent.

 

The government has framed the move as part of a broader GST reform exercise, aimed at maintaining and in some cases increasing the overall tax burden on tobacco.