India's New Tobacco Taxation Framework Takes Effect from February 1
Smokers across India will face higher prices for cigarettes starting February 1, as the central government implements a comprehensive new excise duty regime based on cigarette length. Simultaneously, a health cess will be imposed on pan masala and various tobacco products, marking the first significant tax increase on cigarettes in nearly seven years. This strategic move brings India's tobacco taxation policies closer to international public health standards.
Overhauling the Tax Structure
The newly approved levies, which received parliamentary approval in December, will replace the existing GST compensation cess framework that has been operational since the Goods and Services Tax (GST) rollout in July 2017. From next month, cigarettes and tobacco products will attract additional excise duty and cess over and above the highest 40% GST slab, effectively replacing the current structure of 28% GST plus compensation cess.
The Central Excise Act has undergone amendments to introduce per-stick excise duty on cigarettes, with rates varying significantly based on length. This represents a fundamental shift in how tobacco products are taxed in the country.
Detailed Price Impact Analysis
The increase in cigarette prices will vary considerably depending on the length and type of cigarette. Under the new tax structure:
- Short non-filter cigarettes measuring up to 65 mm will attract an additional excise duty of approximately Rs 2.05 per stick
- Short filter cigarettes of the same length will face a slightly higher tax at about Rs 2.10 per stick
- Medium-length cigarettes (65–70 mm) will see additional duties ranging from Rs 3.60 to Rs 4 per stick
- Long and premium cigarettes measuring 70–75 mm will experience a steeper increase with added duty of around Rs 5.40 per stick
The highest levy of Rs 8.50 per stick has been reserved for cigarettes with unusual or non-standard designs. Government officials have clarified that most popular cigarette brands do not fall under this top slab, meaning the sharpest price hikes will apply only to a limited category of products.
New Excise Rates Effective February 1
The Ministry of Finance has outlined the following structure:
- Cigarettes with length ≤ 65 mm: Rs 2.05–Rs 2.10 per stick excise above 40% GST
- Cigarettes with length ≥ 65 mm: Rs 2.05–Rs 2.10 per stick excise above 40% GST
- Other Cigarettes: Rs 8.50 per stick excise above 40% GST
- Chewing Tobacco: 82% total tax incidence
- Gutkha: 91% total tax incidence
- GST + Cess on Pan Masala: 88% total tax burden
Comprehensive Regulations for Tobacco and Pan Masala Products
Also effective from February 1, a new MRP-based valuation mechanism will come into force for chewing tobacco, khaini, jarda, and gutkha. Under this system, GST will now be calculated based on the retail sale price printed on the pack rather than manufacturing cost, potentially increasing tax collections significantly.
Pan masala manufacturers will need to comply with several new requirements:
- Apply for fresh registration under the health and national security cess law
- Install CCTV cameras covering all packing machines
- Preserve surveillance footage for at least 24 months
- Declare the number and capacity of machines to excise authorities
Manufacturers can claim abatement in excise duty if a packing machine remains non-functional for at least 15 consecutive days. The health and national security cess on pan masala will be levied based on manufacturing capacity while maintaining the overall tax burden at 88%, including GST.
Industry Impact and Economic Rationale
According to Crisil Ratings, the domestic cigarette industry is likely to experience a 6–8% contraction in volumes during the next financial year following the tax hike. Chewing tobacco and jarda scented tobacco will attract an excise duty of 82%, while gutkha will face a higher levy of 91%.
The tax increase serves multiple purposes. Excise duty collections from tobacco products will form part of the divisible pool of central taxes, with 41% shared with states as per Finance Commission recommendations. Proceeds from the pan masala cess will be channelled to states through health awareness and health-related programmes.
Finance Minister Nirmala Sitharaman explained in Parliament that the cess aims to create a "dedicated and predictable resource stream" for two domains of national importance: health and national security.
Aligning with Global Standards
Another crucial factor driving the tax revision is that cigarette taxes in India had remained unchanged since the GST rollout in July 2017. This seven-year freeze stood in sharp contrast to global best practices, as reported by PTI.
International public health guidelines recommend regular increases in tobacco taxes to ensure cigarette prices rise faster than incomes, thereby discouraging consumption. According to World Bank estimates, India's total tax incidence on cigarettes is currently around 53% of the retail price, significantly below the World Health Organization's recommended benchmark of at least 75% for achieving meaningful reductions in tobacco use.
In comparison, countries such as the United Kingdom and Australia tax cigarettes at 80–85% of the retail price, while France, New Zealand and several European Union nations maintain tax levels exceeding 75–80%. Even middle-income countries like Turkiye, South Africa, the Philippines and Chile have, over the past decade, raised cigarette taxation to levels that meet or surpass the WHO benchmark.
Transition from Compensation Cess
The new tax regime follows a decision taken by the GST Council in September 2025 to impose excise duty on tobacco products and a cess on pan masala once the GST compensation cess concludes. The compensation cess introduced in 2017 to offset states' revenue losses will cease after the repayment of Rs 2.69 lakh crore in loans taken during the Covid period.
Initially meant to run for five years until June 2022, the levy was later extended by four years till March 31, 2026, with collections used to repay loans taken by the Centre during the Covid-19 pandemic. The repayment is scheduled to be completed by January 31, 2026, paving the way for the new taxation framework.
The latest tax hike therefore represents India's concerted attempt to realign its tobacco taxation framework with global norms while generating targeted revenues for critical national priorities. This comprehensive approach addresses both public health concerns and fiscal requirements through a structured, length-based taxation system that differentiates between various tobacco products.
