Government Raises Excise Duty on Tobacco Products

Government Raises Excise Duty on Tobacco Products

Why in News? 

Recently, the Government of India has announced a significant revision in excise duties on cigarettes and other tobacco products. The new duty structure, notified by the Ministry of Finance, will come into effect from February 1, 2026.

Highlights of Excise Duty Revision on Tobacco Products

• The Government of India formally notified that the revised excise duty on tobacco products will come into effect on 1 February 2026. This follows the passage of the Central Excise (Amendment) Act, 2025, which Parliament approved in December 2025 to restore and expand excise provisions for tobacco after the phase-out of the GST compensation cess. 
• Under the new tax framework, tobacco products such as cigarettes, chewing tobacco and similar goods will continue to attract the 40% Goods and Services Tax (GST). On top of this, the government will levy an additional excise duty. The previous GST compensation cess that had been applied to sin goods will be discontinued from February 1, 2026.
• The revised excise duty for cigarettes has been specified as a specific levy per quantity rather than only a percentage of price. For manufactured cigarettes, the additional duty ranges from approximately ₹2,050 to ₹8,500 per 1,000 sticks, with the variation depending on the length and type of the cigarette. This duty is payable in addition to the 40% GST. 
• In addition to cigarettes, the tax reform applies to other tobacco categories. Pan masala products containing tobacco and similar items will have the excise duty over and above GST. Bidis, which are hand-rolled tobacco products significant to rural employment, will be taxed at 18% GST.
• Alongside the excise duty, the government has introduced a Health and National Security Cess on pan masala products. This cess is separate from the excise duty and the GST, and aims to broaden the tax base on products.
• To ensure proper duty calculation and collection, the government has notified specific rules such as the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026. 

Reasons Behind the Government’s Decision

• To Sustain High Tax Burden: The government introduced the new excise duty on tobacco products because the existing GST compensation cess is ending on 1 February 2026. The compensation cess was originally imposed after the launch of the Goods and Services Tax in 2017 to make up for state revenue losses. With the end of that cess, the government needed a new tax mechanism to maintain high taxes on cigarettes and related products.

• To Discourage Tobacco Consumption: One key reason for raising excise duty is to reduce tobacco consumption and improve public health outcomes. Tobacco use is a major risk factor for diseases such as cancer, heart disease, and respiratory illness. Higher taxes make tobacco products more expensive, especially for younger people and lower-income consumers, which reduces their ability to purchase these products.

• To Align Taxes with World Health Organization: Despite high tax rates, India’s overall tax burden on cigarettes (about 53% of retail price) remains below the World Health Organization’s recommended 75% benchmark for tobacco taxation. The government raised excise duty to better align with international health standards and discourage consumption more effectively.

Impact of the Revised Excise Duty on Tobacco Products

• Tobacco Manufacturers: The tobacco industry in India faced immediate market reactions after the government announced the new excise duty. Major cigarette makers such as ITC and Godfrey Phillips India saw their share prices fall sharply on stock exchanges on the first trading day of 2026, reflecting investor concern about future sales volume and profit margins.  

• Employment: The revised taxation may affect employment across the tobacco value chain from manufacturing to retail. Tobacco product manufacturers could respond by reducing production or delaying expansion plans if demand weakens. This could affect jobs in factories, logistic networks, and distribution channels. Additionally, small local vendors and retailers may see lower footfall or reduced transaction volumes.

• Budget Planning: Tobacco taxes have long been an important source of indirect tax revenue for the central government. With the updated excise structure, the government expects to collect larger funds that can support budgetary needs, including health programmes. Higher tax inflows will contribute to the Union Budget 2026–27 and help finance public services without raising other tax rates.