Govt hikes excise duty on cigarettes, levies health cess on pan masala from Feb 1

New Delhi, Jan 1 (PTI) The government has imposed an additional excise duty on cigarettes and other tobacco products effective February 1, under a revised tax structure that levies the steepest increase on longer, premium cigarettes.

The Finance Ministry has notified amendments to the Central Excise Act imposing 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 will be over and above 40 per cent GST.

The ministry has also notified the Health and National Security Cess Act, levying cess on the manufacturing capacity of pan masala-related businesses from February 1.

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.

The revised tax structure replaces the existing regime of 28 per cent GST, along with a compensation cess on tobacco and related products.

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 over and above 40 per cent GST, 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.

An "other" category carries a significantly higher duty of Rs 8,500 per 1,000 sticks, but this applies only to unusual or non-standard designs.

Most popular cigarette brands do not fall under this slab.

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

From February 1, tobacco products - including pan masala and cigarettes - will attract 40 per cent GST, while biris (rolled tobacco leaves) will be taxed at 18 per cent.

The finance ministry has also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2025, as per which 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.

Such manufacturers will also have to disclose to the 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. These norms, too, would be effective February 1.

Giving reasons for the hike in excise duty on cigarettes, sources said it will ensure that cigarettes carry a tax burden proportionate to their severe public health impact, and also maintain a tax incidence closer to international best practices.

In India, taxes on cigarettes have 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 emphasise 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 well over 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 Turkey, 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 a cess on pan masala and excise duty on tobacco was approved by Parliament last month.

The GST Council, comprising finance ministers from the Centre and states, had in September decided on the mechanism to levy cess and excise duty on such products over and above GST, once the compensation cess mechanism ended after the repayment of loans.

Currently, a 28 per cent GST and a compensation cess at a varied rate 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 go up to 40 per cent, plus an excise duty and compensation cess.

The GST Council, in September last year, had decided that the compensation cess would cease to exist after the repayment of loans taken to compensate states for GST revenue loss during the COVID-19 pandemic. 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 JD ANZ CS BAL BAL