Tobacco and pan masala to get costlier as new excise, health cess takes effect from February 1

The government has notified February 1 as the date from which additional excise duty on tobacco products, and a health cess on pan masala will be levied, replacing the existing GST compensation cess levy on such 'sin goods'.

A health and national security cess and excise duty on pan masala and tobacco products respectively will be over and above 40 per cent Goods and Services Tax (GST) rate, while in case of 'biris' it would be on top of the 18 per cent GST rate effective February 1, 2026, as per notifications issued by the Finance Ministry late on December 31, 2025.

A new MRP-based valuation mechanism has been introduced for tobacco products (chewing tobacco, filter khaini, jarda scented tobacco, gutkha) whereby GST value shall be determined based on the retail sale price declared on the package.

An additional excise duty of 91 per cent on gutkha, 82 per cent on chewing tobacco, and 82 per cent on jarda scented tobacco will be levied. Cigarettes, depending on length and filter, will be taxed in the range of Rs 2,050–Rs 8,500 per 1,000 sticks.

The proceeds from excise duty will be redistributed among states in accordance with the Finance Commission's recommendations. Centre's tax revenues form part of the divisible pool, and 41 per cent of it is shared among the states.

Besides, the health cess will be levied on the production capacity of pan masala manufacturing units. Part of the revenue from this cess will be shared with states through health awareness or other health-related schemes/activities.

The purpose of this health cess is to create a "dedicated and predictable resource stream" for two domains of national importance, health and national security, Finance Minister Nirmala Sitharaman had said in Parliament last month.

The Finance Ministry has also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026.

The levy of a cess on pan masala and the excise duty on tobacco were 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 repayment of loans.

Currently, a 28 per cent GST and a compensation cess at varying rates are levied on all tobacco products, including pan masala, cigarettes, chewing tobacco, cigars, hookah, zarda, and scented tobacco.

From February 1, the GST rate will increase to 40 per cent, plus an excise duty and a compensation cess.

The GST Council in September last year had decided that the compensation cess will cease to exist after the repayment of loans taken to compensate states for GST revenue loss during Covid. 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 compensate for the revenue loss suffered by states due to the 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.