Additional excise duty on tobacco, health cess on pan masala to be effective from Feb 1

New Delhi, Jan 31 : An additional excise duty on cigarettes and tobacco products, and a health cess on pan masala, over and above the highest 40 per cent GST rate, will come into effect from February 1.

The cess and excise levies will replace the existing 28 per cent Goods and Services Tax (GST), plus compensation cess, on such ‘sin goods’ which was there on these items since GST was rolled out on July 1, 2017.

Also, from February 1, a new MRP-based valuation mechanism will be introduced for tobacco products (chewing tobacco, filter khaini, jarda scented tobacco, gutkha) whereby GST shall be determined based on retail sale price declared on the package.

Pan masala manufacturers need to apply for a new registration under the health and national security cess law from February 1. Manufacturers of such products will have to install a functional CCTV system covering all packing machines and preserve the footage for at least 24 months.

They will also have to disclose with excise authorities the number of machines and their capacities and can also claim abatement in excise duty in case a machine is non-functional for a minimum of 15 consecutive days.

Effective February 1, the Central Excise Act has been amended to impose excise duty ranging from Rs 2.05-8.50 per stick based on cigarette length.

Besides, the health and national security cess Act levies cess on manufacturing capacity of pan masala units. The total tax incidence on pan masala after taking into account 40 per cent GST will be retained at the current level of 88 per cent.

Under the new tax structure, short non-filter cigarettes (up to 65 mm) will attract an additional duty of about Rs 2.05 per stick, while short filter cigarettes of the same length will be charged around Rs 2.10 per stick.

Medium-length cigarettes (65-70 mm) will face an additional duty of roughly Rs 3.6-4 per stick, and long, premium cigarettes (70-75 mm) about Rs 5.4 per stick.

The highest duty of Rs 8.50 per stick applies only to unusual or non-standard designs of cigarettes and most popular cigarette brands do not fall under this slab.

Crisil Ratings in a report has said that the domestic cigarette industry will see a 6-8 per cent volume contraction in the next fiscal, following the imposition of additional excise duties.

Chewing and jarda scented tobacco, and gutkha will attract an excise duty of 82 per cent, and 91 per cent, respectively.

The proceeds from excise duty on tobacco products will be redistributed among states as per Finance Commission recommendations. The Centre’s tax revenues form part of the divisible pool and 41 per cent of it is shared among the states.

Besides, the proceeds from the cess levied on production capacity of pan masala manufacturing units will be shared with states through health awareness or other health-related schemes/activities.

The purpose of this health cess  is to create a “dedicated and predictable resource stream” for two domains of national importance – health and national security, Finance Minister Nirmala Sitharaman had said in Parliament in December.

In India, taxes on cigarettes had remained unchanged in the past 7 years since the introduction of GST in July 2017. This is in contrast to global best practices and public health guidance which emphasises annual increases in duties to ensure that cigarette prices rise faster than incomes.

According to World Bank estimates, India’s total tax incidence on cigarettes is approximately 53 per cent of the retail price, which is substantially lower than the World Health Organization’s recommended benchmark of 75 per cent or more for achieving meaningful reductions in tobacco consumption.

Countries like the United Kingdom and Australia tax cigarettes at 80—85 per cent of the retail price, while France, New Zealand, and several EU member states maintain tax incidence levels exceeding 75—80 per cent.

Middle-income countries-such as Turkiye, South Africa, the Philippines, and Chile-have over the past decade raised cigarette taxation to levels approaching or exceeding the WHO benchmark.

The levy of such cess on pan masala and excise duty on tobacco was approved by Parliament in December. The GST Council, comprising finance ministers from Centre and states, had in September 2025, decided on the mechanism to levy cess and excise duty on such products over and above GST once the compensation cess mechanism ended after repayment of loans.

The GST Council had decided that the compensation cess will cease to exist after the repayment of loans taken to compensate states for GST revenue loss during Covid. The Rs 2.69 lakh crore loan will be repaid by January 31, 2026.

At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.

The levy of compensation cess was later extended by 4 years till March 31, 2026, and the collection is being used to repay the Rs 2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period. (PTI)