NEW DELHI: The Center on Monday decided to overhaul the taxation of tobacco and related products, including cigarettes, snuff, smoking mixes and pan masala, with a proposal to increase excise duty and replace Goods and Services Tax (GST) compensation on them with a cess for health and national security. Finance Minister Nirmala Sitharaman has introduced two bills in the Lok Sabha aimed at keeping the overall tax impact stable while ensuring that states benefit from excise revenue.
Tobacco products are subject to both GST and Central Excise. In order to maintain the overall tax burden after the abolition of compensatory cess, the government proposed to amend the Central Excise Act and introduce a new cess.
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The Central Excise Bill 2025 proposes to increase excise duty on tobacco products. For example, the tax on tobacco would increase from 64% to 70% when introduced. Unlike cess revenue, revenue from the Centre’s tax revenue like GST, income tax and excise duty is shared with the states.
The bill noted that with the introduction of GST in 2017, the excise duty on tobacco and products, some of the few products on which the tax has been retained, “has been significantly reduced to enable the collection of compensatory cess without much impact on their tax impact”.
“The countervailing cess imposed on tobacco and tobacco products, wherever possible, will be discontinued once the interest payment obligations and credit obligations under the countervailing cess account are fully settled,” he added.
Tobacco and its products like cigarettes, pan masala, gutkha are currently subject to 28% GST and a countervailing duty which is as high as 290% in some cases like smoking mixes for pipes. After their transition to the new rate structure at a time to be decided by the Finance Minister, these will move to 40% GST and the remaining gap will be filled by the proposed new rate and additional excise duty.
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The Health Security and National Security Bill of 2025 proposes a new tax aimed at public health and national security. It will be collected from the production capacity of pan masala producers, an industry considered prone to tax evasion. The bill allows other tobacco products to be included in capacity-based taxation through notification, but pan masala is specifically mentioned.
Under capacity-based taxation, the duty payable is calculated based on the production capacity of installed machinery rather than the actual quantity of products leaving the factory.
The bills come as the center is expected to repay in full by March ₹2.69 trillion in debt that it raised to support states during the pandemic from compensation proceeds.
Tax reforms
Mahesh Jaising, Partner and Indirect Tax Leader at Deloitte India, said with the end of GST compensation, GST 2.0 brings a more efficient and transparent framework that reduces complexity for businesses while enhancing compliance.
“At the same time, the new Health and National Security Act and the excise tax amendment ensure that critical national priorities – public health and safety – are supported through a dedicated revenue stream from selected goods,” Jaising said.
The overall tax impact is expected to remain largely the same for tobacco and pan masala, he added.
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“Importantly, the process will be operationalized through a capacity-based tax model where manufacturers self-declare machinery and production capacity, ensuring predictability and reducing leakages. Together, these measures are expected to balance fiscal sustainability with economic growth and create a predictable and progressive tax environment for both industry and government,” Jaising noted.
The GST Council had earlier explored capacity-based taxation for the industry but decided not to implement it as GST is a tax on consumption rather than production. New efforts are attempting this model, at least for pan masala as per the proposed cess.
