Tobacco, Pan Masala to Get Costlier from Feb 1, 2026: Govt Ends GST Cess, Imposes New Excise Duty & Health Cess

The Union Government has formally notified February 1, 2026 as the date from which a new taxation regime for tobacco products and pan masala will come into effect, marking a major restructuring of India’s indirect tax framework on so-called “sin goods”.

Under the new system, additional excise duty will be levied on tobacco products, while a Health and National Security Cess will be imposed on pan masala, replacing the GST compensation cess, which will cease to exist from the same date.

The changes were notified by the Ministry of Finance on January 1, 2026, following parliamentary approval of two key legislations during the Winter Session of Parliament in December 2025.

New GST Rates from February 1, 2026

As per the notification:

• Pan masala, cigarettes, tobacco and related products will attract a 40% Goods and Services Tax (GST)

• Bidis will attract 18% GST, after being shifted from the now-defunct 28% slab

These GST rates will apply in addition to the newly introduced levies.

Additional Levies Explained

1. Health and National Security Cess on Pan Masala

• Levied on manufacture of pan masala

• Introduced under the Health Security and National Security Act, 2025

• Designed as a dedicated, non-lapsable funding stream for:

  1. National security preparedness

  2. Technological upgradation

  3. Capacity building

  4. Advanced equipment procurement

The Finance Ministry clarified that general tax revenues cannot always ensure long-term funding for national security, and hence a purpose-specific cess was necessary without increasing the tax burden on the general population.

2. Additional Excise Duty on Tobacco Products

• Imposed under the Central Excise (Amendment) Act, 2025

• Applies to:

  1. Cigarettes

  2. Cigars

  3. Hookah tobacco

  4. Chewing tobacco

  5. Zarda

  6. Scented tobacco

  7. Smoking mixtures for pipes and cigarettes

  8. Tobacco substitutes

The excise duty will now have a meaningful fiscal impact, reversing the earlier situation where excise duty on cigarettes had been reduced to a “fraction of a paisa” per stick due to GST.

Why the Change? Finance Ministry’s Rationale

In an accompanying FAQ note, the Ministry of Finance highlighted key concerns:

• GST compensation cess rates on tobacco had not been revised since July 2017

• Cigarette affordability has stagnated or increased over the past decade

• This trend runs contrary to World Health Organization (WHO) guidelines, which recommend:

  • Annual increases in specific excise duties

  • Prices rising faster than consumer incomes

India’s total tax incidence on cigarettes currently stands at around 53% of retail price, while the WHO benchmark is 75%.

End of GST Compensation Cess

The GST compensation cess, originally introduced for five years to compensate States for revenue losses after GST rollout, will fully end on February 1, 2026.

Why the Cess Was Extended

• Originally scheduled to end in 2022

• Extended due to:

  • Revenue shortfall during the COVID-19 pandemic

  • Centre borrowing to compensate States

• Proceeds were used to repay loans raised for State compensation

On September 22, 2025, the government had already removed the cess from most goods, retaining it only for tobacco products until loan repayment concluded.

New Valuation Mechanism for Smokeless Tobacco

From February 1, 2026, GST valuation for smokeless tobacco products such as:

• Chewing tobacco

• Filter khaini

• Jarda

• Scented tobacco

• Gutkha

will be based on the declared retail sale price (RSP) printed on the package, reducing under-reporting and tax leakage.

Key Provisions of Central Excise (Amendment) Act, 2025

Passed in the first week of December 2025, the Act significantly raises excise duties:

Product	Earlier Duty	Revised Duty
Cigarettes	₹200–₹735 per 1,000 sticks	₹2,700–₹11,000 per 1,000 sticks
Chewing tobacco	25%	100%
Hookah tobacco	25%	40%
Smoking mixtures	60%	325%

The legislation aims to:

• Protect tax incidence after cess removal

• Discourage tobacco consumption

• Strengthen public health outcomes

Assurances to States, Farmers and Workers

Replying to the Rajya Sabha debate, Finance Minister Nirmala Sitharaman clarified:

• The increased levy is excise duty, not a cess

• Revenue will be shared with States

• Tobacco farmers and beedi workers will not be adversely impacted

Key Welfare Data

• Over 1.12 lakh acres shifted from tobacco to alternative crops between 2017-18 and 2021-22

• 49.82 lakh registered beedi workers

• Labour welfare schemes continue through dedicated welfare organisations

Public Health Objective

The government reiterated that tobacco products remain highly affordable in India, undermining health goals. Even after GST introduction, combined taxes failed to meet WHO benchmarks annually.

The new excise structure is intended to:

1. Reduce affordability

2. Protect future generations

3. Align India’s tobacco taxation with global public-health standards