Higher excise duty on cigarettes, health cess on pan masala effective February 1

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 1The 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 2017Also from February 1 a new MRPbased 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 packagePan 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 monthsThey 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 nonfunctional for a minimum of 15 consecutive daysEffective February 1 the Central Excise Act has been amended to impose excise duty ranging from Rs 205850 per stick based on cigarette lengthBesides 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 centUnder the new tax structure short nonfilter cigarettes up to 65 mm will attract an additional duty of about Rs 205 per stick while short filter cigarettes of the same length will be charged around Rs 210 per stickMediumlength cigarettes 6570 mm will face an additional duty of roughly Rs 364 per stick and long premium cigarettes 7075 mm about Rs 54 per stickThe highest duty of Rs 850 per stick applies only to unusual or nonstandard designs of cigarettes and most popular cigarette brands do not fall under this slabCrisil Ratings in a report has said that the domestic cigarette industry will see a 68 per cent volume contraction in the next fiscal following the imposition of additional excise dutiesChewing and jarda scented tobacco and gutkha will attract an excise duty of 82 per cent and 91 per cent respectivelyThe proceeds from excise duty on tobacco products will be redistributed among states as per Finance Commission recommendationsThe Centres tax revenues form part of the divisible pool and 41 per cent of it is shared among the statesBesides the proceeds from the cess levied on production capacity of pan masala manufacturing units will be shared with states through health awareness or other healthrelated schemesactivitiesThe purpose of this health cess is to create a dedicated and predictable resource stream for two domains of national importance health and national securityFinance Minister Nirmala Sitharaman had said in Parliament in DecemberIn 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 incomesAccording to World Bank estimates Indias total tax incidence on cigarettes is approximately 53 per cent of the retail price which is substantially lower than the World Health Organizations recommended benchmark of 75 per cent or more for achieving meaningful reductions in tobacco consumptionCountries 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 7580 per centMiddleincome countriessuch as Turkiye South Africa the Philippines and Chilehave over the past decade raised cigarette taxation to levels approaching or exceeding the WHO benchmarkThe 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 loansThe 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 CovidThe Rs 269 lakh crore loan will be repaid by January 31 2026At 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 implementationThe levy of compensation cess was later extended by 4 years till March 31 2026 and the collection is being used to repay the Rs 269 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid periodThis story has been sourced from a 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