The Indian government has officially announced a significant overhaul of the tax structure on tobacco products and pan masala, marking a pivotal shift from the previous Goods and Services Tax (GST) compensation cess regime. The new framework introduces additional excise duties and a novel 'Health Security se National Security Cess', which will be applicable starting February 1.
New Tax Structure: A Three-Layer Model
Under the revised system, the taxation on items like cigarettes will now follow a three-part model: a base 40 per cent GST rate, plus a new central excise duty, and the existing National Calamity Contingent Duty (NCCD). This move transitions the levy from the old compensation cess to additional duties above the 40 per cent slab under the so-called GST 2.0 framework.
For cigarettes, the excise duty will range between Rs 2,050 to Rs 8,500 per thousand sticks, applied over and above the 40 per cent GST. Meanwhile, pan masala will be subjected to a proposed 48 per cent 'Health Security se National Security Cess', as per the Health Security se National Security Cess Bill, 2025. These new rates replace the old central excise rate of 5 per cent.
Calibrated Rates for Pan Masala and Tobacco Variants
Officials clarified that the GST Council decided to raise the GST rate on pan masala from 28 per cent to the statutory ceiling of 40 per cent. The remaining part of the existing tax burden has been shifted to the new machine-based cess. This calibration ensures the combined tax incidence of GST and the new cess stays broadly equivalent to the previous total of GST plus the compensation cess.
Previously, pan masala attracted a 28 per cent GST plus a 60 per cent cess, totalling 88 per cent. Under the new system, with a 40 per cent GST and a 48 per cent cess, the total levy remains at 88 per cent.
The excise duty structure for other tobacco products is highly differentiated:
- Hukkah (Hookah): 33 per cent duty.
- Homogenised tobacco, preparations with chewing tobacco, snuff: 60.5 per cent duty.
- Chewing tobacco and jarda scented tobacco: A higher rate of 82 per cent.
- Smoking mixtures for pipes and cigarettes: A steep duty of 279 per cent.
Furthermore, for chewing tobacco, jarda scented tobacco, and gutkha manufactured using packing machines and sold in pouches, the central excise duty will be levied based on production capacity from February 1.
Market Reaction and Rationale Behind the Move
The announcement triggered an immediate negative reaction in the stock market. Shares of major cigarette manufacturers plummeted on Thursday. ITC's share price closed at Rs 363.95, down 9.69 per cent, while Godfrey Phillips India ended 17.17 per cent lower at Rs 2,288 on the BSE. Industry experts, preferring anonymity, estimate the effective increase in additional levies to be in the range of 20 to 30 per cent.
The government had introduced two legislations in Parliament last month to enact these higher levies. This strategic shift comes as the GST compensation cess is scheduled to lapse after March 2026. Originally, under the GST (Compensation to States) Act, 2017, states were guaranteed compensation for revenue losses for five years post-GST rollout. Although that period ended in June 2022, the cess collection was extended until March 2026 to repay loans taken to bridge the states' revenue gap.
The new tax structure, therefore, serves a dual purpose: it aims to maintain a consistent revenue stream for the government while ostensibly aligning with public health objectives by keeping taxes on harmful products high. The coming months will reveal the full impact of these changes on industry dynamics and consumer behaviour.
