Government Increases Excise Duty on Cigarettes and Introduces Health Cess on Pan Masala Effective February 1

The government has introduced a new excise duty on cigarettes and tobacco products starting February 1. This revised tax structure imposes the highest increase on longer, premium cigarettes. The Finance Ministry has amended the Central Excise Act to impose an excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks based on cigarette length, effective February 1. This duty is in addition to the existing 40 per cent GST.

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From February 1, tobacco products, including pan masala and cigarettes, will be subject to a 40 per cent GST rate. Meanwhile, biris rolled tobacco leaves will be taxed at 18 per cent. The new tax structure replaces the previous regime of 28 per cent GST and a compensation cess on tobacco and related products. The Finance Ministry has also notified the Health and National Security Cess Act, which imposes a cess on the manufacturing capacity of pan masala-related businesses from February 1.

Excise Duty Details for Tobacco Products

The revised tax structure introduces specific excise duties based on cigarette length. Short non-filter cigarettes up to 65 mm will incur an additional duty of about Rs 2.05 per stick over the existing GST. Short filter cigarettes of the same length will be charged around Rs 2.10 per stick. Medium-length cigarettes measuring 65-70 mm will face an additional duty of roughly Rs 3.6-4 per stick, while long, premium cigarettes measuring 70-75 mm will attract about Rs 5.4 per stick.

An additional category carries a significantly higher duty of Rs 8,500 per 1,000 sticks but applies only to unusual or non-standard designs. Most popular cigarette brands do not fall under this slab. Chewing and jarda scented tobacco will attract an excise duty of 82 per cent, while gutkha will be taxed at 91 per cent.

Implementation of New Rules for Tobacco Manufacturers

The Finance Ministry has also introduced rules for manufacturers of chewing tobacco, jarda scented tobacco, and gutkha. These manufacturers must install a functional CCTV system covering all packing machines and preserve footage for at least 24 months. They must disclose the number of machines and their capacities to excise authorities and can claim abatement in excise duty if a machine is non-functional for at least 15 consecutive days.

This move aims to ensure that cigarettes carry a tax burden proportionate to their severe public health impact while aligning with international best practices. In India, taxes on cigarettes have remained unchanged since the introduction of GST in July 2017. This contrasts with global best practices that emphasise annual increases in duties to ensure cigarette prices rise faster than incomes.

Global Comparison of Cigarette Taxation

According to World Bank estimates, India's total tax incidence on cigarettes is about 53 per cent of the retail price. This is significantly lower than the World Health Organization's recommended benchmark of at least 75 per cent for achieving meaningful reductions in tobacco consumption. Countries like the United Kingdom and Australia tax cigarettes at well over 80-85 per cent of the retail price.

France, New Zealand, and several EU member states maintain tax incidence levels exceeding 75-80 per cent. Middle-income countries such as Turkey, South Africa, the Philippines, and Chile have raised cigarette taxation over the past decade to levels approaching or exceeding the WHO benchmark.

Background on Compensation Cess Mechanism

The levy of cess on pan masala and excise duty on tobacco was approved by Parliament last month. The GST Council decided in September to levy cess and excise duty on such products over and above GST once the compensation cess mechanism ended after loan repayment.

Currently, a 28 per cent GST and a varied rate compensation cess are levied on all tobacco products like pan masala, cigarettes, chewing tobacco, cigar, hookah, zarda, and scented tobacco. From February 1, the GST rate will increase to 40 per cent plus an excise duty and compensation cess.

The GST Council had decided that the compensation cess would cease after repaying loans taken to compensate states for GST revenue loss during COVID-19. The Rs 2.69 lakh crore loan will be repaid by January 31, 2026.

When GST was introduced on July 1, 2017, a compensation cess mechanism was established for five years until June 30, 2022, to make up for revenue loss suffered by states due to GST implementation. The levy was later extended by four years until March 31, 2026.

With inputs from PTI