New Tobacco Tax Regime Kicks In From February 1, Replacing GST Compensation Cess

From February 1, cigarettes, pan masala and other tobacco products will come under a new taxation framework, as the Centre replaces the GST compensation cess with additional excise duties and a health and national security cess. The move ends the nine-year-old system of 28% GST plus compensation cess, introduced with GST in 2017, and marks the biggest overhaul of “sin goods” taxation since then. The change follows the scheduled end of the compensation cess after repayment of Covid-era loans taken to support states.

Under the revised regime, excise duty on cigarettes will be levied per 1,000 sticks, based on whether they are filtered and their length, with rates ranging from about Rs 2.05 to Rs 8.50 per stick. An MRP-based valuation system will also be introduced for chewing tobacco, gutkha, jarda and similar products, tightening compliance and reducing under-reporting. Chewing tobacco and jarda will attract an excise duty of 82%, while gutkha will be taxed at 91%, alongside the highest 40% GST slab.

Pan masala manufacturers will face stricter controls, including fresh registration, mandatory CCTV coverage of packing machines and disclosure of production capacity. While the government aims to maintain overall tax incidence near current levels, rating agency Crisil has warned that higher excise duties could lead to a 6–8% decline in cigarette volumes next year. The Centre says the new levies will ensure stable revenues for states while aligning tobacco taxation more closely with public health objectives.

Pic courtesy: google/ images are subject to copyright