Cess on pan masala, additional excise duty on cigarettes and tobacco products from Feb 1

Revenues from excise will enter the divisible pool, while cess proceeds will fund public health and national security initiatives.
| Photo Credit:
Jerome Maurice

Finance Ministry on Wednesday notified February 1 as the appointed date for implementation of the Health Security se National Security Cess Act and the Central Excise (Amendment) Act. These two acts aim to maintain the GST on cigarettes, pan masala, and other tobacco products.

The Health Security se National Security Cess Act aims to levy a cess on pan masala. Meanwhile, the Central Excise (Amendment) Act intends to impose an additional levy on cigarettes and various tobacco products. Currently, all these products attract a GST of 28 per cent along with a compensation cess.

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 the compensation cess was later extended by four years, till March 31, 2026, and the collection is being used to repay the loan the Centre took to compensate states for the GST revenue loss during the Covid period.

Post rationalisation of GST, while there are three rates — 5, 18 and 40 per cent — tobacco and related products remain the only category with a 28 per cent GST, along with a compensation cess. With the enactment of laws, tobacco and tobacco-related products will continue to attract additional levies over and above the 40 per cent GST rate that would apply to sin goods.

While the revenues from the excise duty on tobacco would be part of the divisible pool of tax revenues, the collection from the health and national security cess would go towards funding public health initiatives and national security, as well as maintaining high taxation on ‘sin goods’.

The Central Excise (Amendment) Act provides for a new central excise duty on tobacco products, including cigarettes, chewing tobacco, cigars, hookahs, zarda, and scented tobacco, replacing the existing compensation cess. The act seeks to levy excise duty on cigars/cheroots/cigarettes at a rate of ₹5,000-11,000 per 1,000 sticks, depending on length. Also, it proposes a levy of 60-70 per cent on unmanufactured tobacco and 100 per cent on nicotine and inhalation products. These two acts will ensure that the tax incidence on sin goods such as tobacco and pan masala remains unchanged after the discontinuation of the compensation cess.

Published on December 31, 2025