Tobacco Tax Restructuring For UPSC IAS Exam

Why in the News?

India has notified the Central Excise (Amendment) Act, 2025, along with related tax changes on tobacco products, which will come into force from February 1, 2026.
The move ends the GST compensation cess on tobacco, revises central excise duties, and restructures GST rates to balance fiscal needs with public health objectives.
The amendment marks a significant step in recalibrating the taxation of sin goods, particularly tobacco, which continues to remain partly outside the GST framework.

Tobacco products occupy a special position in India’s indirect tax system because they are not fully subsumed under GST.
Even after the introduction of GST in 2017, tobacco has continued to attract:
- GST,
- Central excise duty, and
- GST compensation cess (till February 2026).
This multi-layered taxation reflects the dual policy objective of:
- Raising government revenue, and
- Discouraging tobacco consumption due to its adverse health effects.
International public health bodies, including the World Health Organization, recommend high and progressively increasing tobacco taxes so that prices rise faster than income growth.

The Act amends the Central Excise Act, 1944 to revise excise duties on tobacco and tobacco-related products.
The revision is designed to maintain and enhance the overall tax burden after the withdrawal of the GST compensation cess.

Unmanufactured tobacco saw its excise duty increased from 64 percent to 70 percent.
Chewing tobacco experienced a sharp increase from 25 percent to 100 percent, reflecting concerns over its widespread consumption.
Hookah and gudaku tobacco duties were raised from 25 percent to 40 percent.
Smoking mixtures for pipes and cigarettes witnessed a steep hike from 60 percent to 325 percent.
Cigarettes now attract excise duties ranging from ₹2,700 to ₹11,000 per thousand sticks, compared to the earlier range of ₹200 to ₹735.

Higher excise duties aim to ensure that real tobacco prices increase faster than incomes, making tobacco progressively less affordable.
This approach aligns India’s tax policy with global public health best practices to reduce tobacco-related morbidity and mortality.

Beedis have been placed under a lower GST slab of 18 percent, acknowledging their consumption profile and employment linkages.
All other tobacco products, including cigarettes and smokeless tobacco, have been placed under a 40 percent GST slab.
A new valuation mechanism has been introduced for smokeless tobacco products such as gutkha, khaini, chewing tobacco, and jarda.
- GST will now be calculated on the retail sale price declared on the package, reducing under-reporting and tax evasion.
These changes aim to improve tax compliance, transparency, and revenue predictability.

The GST compensation cess was an additional levy imposed on select goods to compensate States for revenue losses after GST implementation.
It was introduced in July 2017 for an initial period of five years, ending in June 2022.

The cess was extended till March 31, 2026, due to revenue shortfalls during the COVID-19 pandemic.
It was primarily used to repay about ₹2.7 lakh crore borrowed by the Centre to compensate States.
On tobacco products, the cess was levied over and above GST and central excise duty.

From February 1, 2026, the GST compensation cess will be completely phased out, including on tobacco products.
To offset this, the government has introduced higher excise duties and new cesses under separate legislation.

From February 2026, tobacco and pan masala will attract additional excise duties and a Health and National Security Cess, operating over and above GST.
These measures are enabled by:
- The Central Excise (Amendment) Act, 2025, and
- The Health and National Security Cess legislation, approved by Parliament in December 2025.
The Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines Rules, 2026 have been notified.
- These rules provide a framework for capacity-based determination of production and collection of excise duty, especially for smokeless tobacco manufacturers.