Fresh tax regime replaces GST compensation cess on tobacco and pan masala products
The government on Wednesday notified 1 February 2026, as the start date for a new tax regime on tobacco products and pan masala, replacing the existing GST compensation cess with fresh excise duties and a dedicated cess.
Under the notification, cigarettes, tobacco, pan masala and similar products will continue to attract a 40 per cent Goods and Services Tax (GST), while biris will be taxed at 18 per cent. In addition to GST, pan masala will be subject to a Health and National Security Cess, while cigarettes and other tobacco products will face an additional excise duty.
The finance ministry late on Wednesday specified the excise duty on cigarettes at Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on cigarette length, effective 1 February. The levy will be imposed over and above GST.
The ministry also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026, outlining the framework for assessing and collecting duties from manufacturers.
The changes follow Parliament’s approval in December of two Bills enabling the levy of excise duty on tobacco products and a new cess on pan masala manufacturing. With the fresh levies coming into force, the GST compensation cess, currently charged at varying rates, will be discontinued from 1 February.
Tobacco stocks fell sharply on Thursday after the announcement, as investors priced in the impact of higher taxes on cigarette demand in India, home to an estimated 100 million smokers. Shares of ITC, the country’s largest cigarette maker and producer of Gold Flake, declined 4.4 per cent, while Godfrey Phillips India, which distributes Marlboro in the domestic market, dropped 7.7 per cent.
ITC shares were trading at Rs 385.25, their lowest level since June 2024, and were on track for their worst session since February 2022. The stock was the biggest drag on the benchmark Nifty 50 index and also led declines in the FMCG index, which was down 1.6 per cent.
The move follows the passage of the Central Excise (Amendment) Bill, 2025, which replaces a temporary levy on cigarettes and tobacco products. While the government has not quantified the impact on retail prices, analysts expect companies to pass on part of the higher tax burden to consumers.
