Additional Excise Duty and Health Cess on Tobacco and Pan Masala to Take Effect from February 1

New Tax Structure Replaces GST Compensation Cess​

The government has notified February 1, 2026, as the date from which additional excise duty on tobacco products and a health and national security cess on pan masala will come into force. This new framework replaces the existing GST compensation cess that has been levied on these products so far.

Under the revised structure, the new levies will apply over and above the Goods and Services Tax. Tobacco products and pan masala will attract a 40 percent GST rate, while biris will continue to be taxed at 18 percent GST, with the additional levies imposed on top of these rates.

MRP Based Valuation Introduced for Tobacco Products​

A new valuation mechanism has been introduced for certain tobacco products including chewing tobacco, filter khaini, jarda scented tobacco, and gutkha. The GST value for these products will now be determined based on the retail sale price declared on the package, shifting the tax calculation to an MRP based system.

Excise Duty Rates and Cigarette Taxation​

The government has specified steep excise duty rates on various tobacco products. Gutkha will attract an additional excise duty of 91 percent, while chewing tobacco and jarda scented tobacco will be taxed at 82 percent each.

Cigarettes will be taxed based on their length and whether they are filtered, with excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks.

Revenue Sharing with States​

The proceeds from the excise duty will form part of the Centre’s divisible pool of taxes, with 41 percent of the revenue shared with states in line with the Finance Commission’s recommendations.

In addition, the health and national security cess on pan masala will be levied based on the production capacity of manufacturing units. A portion of the revenue from this cess will be shared with states through health awareness initiatives and other health related schemes.

Objective of the Health and National Security Cess​

The health cess has been introduced to create a dedicated and predictable stream of funding for health and national security priorities. This objective was outlined in Parliament during discussions on the levy.

New Rules for Packing Machines Notified​

The Finance Ministry has also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines Capacity Determination and Collection of Duty Rules, 2026. These rules lay down the framework for assessing and collecting duty based on manufacturing capacity.

Background of GST Compensation Cess Transition​

Currently, tobacco products including cigarettes, pan masala, cigars, hookah, zarda, and scented tobacco attract a 28 percent GST along with a compensation cess at varying rates. From February 1, the GST rate will rise to 40 percent, alongside the new excise duty and cess.

The compensation cess mechanism was originally introduced with the rollout of GST on July 1, 2017, to offset revenue losses faced by states. It was initially valid for five years and later extended, with collections being used to repay loans taken to compensate states during the Covid period. The outstanding loan amount of Rs 2.69 lakh crore is scheduled to be fully repaid by January 31, 2026, paving the way for the transition to the new tax regime.