New Tobacco Taxes in India: 40% GST Plus Excise Duty from Feb 2026

A New Era for Tobacco Taxation in India

The Indian government has announced a significant overhaul of the taxation framework for tobacco products and pan masala, effective from February 1, 2026. This move replaces the Goods and Services Tax (GST) Compensation Cess with a new structure comprising an additional Central Excise Duty on tobacco and a Health and National Security Cess on pan masala. These new levies will be applied over and above the existing GST rates, signaling a continued government focus on taxing 'sin goods' to discourage consumption and secure revenue.

This policy shift follows the 56th GST Council meeting on September 3, 2025, and subsequent parliamentary approval in December 2025. The primary objective is to maintain revenue neutrality after the sunset of the GST Compensation Cess while simultaneously addressing public health concerns associated with tobacco use.

Understanding the New Tax Structure

Under the revised regime, the fundamental GST rates for these products remain unchanged. Most tobacco products, including cigarettes, chewing tobacco, and pan masala, will continue to attract a 40% GST rate. Biris, however, will be taxed at a lower rate of 18%. The key change is the replacement of the compensation cess. Tobacco products will now be subject to an additional layer of Central Excise Duty, while pan masala will attract the new Health and National Security Cess. The National Calamity Contingent Duty (NCCD) will also continue to be a part of the tax structure on cigarettes.

This multi-layered tax system ensures that these products remain in a high tax bracket. The government's intent is clear: to make these goods more expensive for the end consumer, thereby potentially reducing consumption among the country's 275 million tobacco users.

Shift to RSP-Based Valuation

A crucial component of the new framework is the shift in how GST liability is calculated. Starting February 1, 2026, the taxable value for GST on notified tobacco goods will be determined by the Retail Sale Price (RSP) printed on the package. This is a departure from the previous system, where GST was calculated on the transaction value between the supplier and the recipient. This change is designed to standardize tax calculation across the industry, limit the under-reporting of transaction values, and plug potential revenue leakages.

By linking the tax to the final retail price, the government aims to create a more transparent and uniform valuation method that is less susceptible to manipulation. This will likely impact the pricing strategies and overall GST liability for manufacturers and distributors in the sector.

Breakdown of New Excise Duties

The additional excise duty imposed on cigarettes varies based on their length. This calibrated approach targets different market segments within the cigarette industry. The new duties are levied per one thousand sticks and are a significant addition to the overall tax burden.

These rates are specified in addition to the 40% GST and the existing NCCD, reinforcing the high-tax policy on these products.

Rationale for the Tax Overhaul

The government's decision is driven by several factors. First, with the GST Compensation Cess mechanism concluding, there was a need to establish a new revenue stream to prevent a fiscal gap. The cess was originally introduced to compensate states for revenue losses after the GST rollout. Second, there is a strong public health argument. Global bodies like the World Health Organization (WHO) recommend a minimum tax burden of 75% on all tobacco products to effectively curb consumption. India's tax revisions are a step toward this international benchmark.

Furthermore, the previous excise duty on cigarettes had remained largely unchanged since the introduction of GST in 2017. This stagnation, coupled with rising incomes, had made cigarettes more affordable in real terms. The new excise duty corrects this anomaly and ensures the tax burden keeps pace with economic growth.

Market and Industry Impact

The announcement of the new tax structure had an immediate impact on the stock market. Shares of major tobacco companies, such as ITC Ltd. and Godfrey Phillips India, saw significant declines. Investors reacted to the increased tax burden, which is expected to put pressure on company margins. Analysts predict that manufacturers will pass on the higher costs to consumers. For instance, some market experts suggest that ITC may need to increase cigarette prices by at least 15% to absorb the impact of the new duties. This will test price elasticity and could influence consumption patterns in the long run.

Legal and Constitutional Framework

The new tax regime is supported by a solid legal foundation. Parliament passed two key pieces of legislation in December 2025: the Health Security and National Security Cess Act and the Central Excise (Amendment) Act, 2025. The constitutional basis for levying excise duty on tobacco rests with the Union Government under Entry 84 of List I, a power that the Supreme Court has affirmed can co-exist with GST. The new cess on pan masala is levied under Parliament's residual powers (Entry 97 of List I) and Article 270, which allows for cesses for specific purposes.

Conclusion

The implementation of additional excise duties and a new cess from February 1, 2026, marks a significant transition in India's policy on sin goods. This move effectively ends the GST compensation era for these products and establishes a more permanent, excise-based tax framework. By increasing the tax burden and standardizing valuation methods, the government aims to achieve the dual goals of safeguarding public health and ensuring fiscal stability. The long-term effects on industry pricing, consumer behavior, and overall tax revenue will be closely watched.