Cigarettes, pan masala, and several tobacco products have become costlier from February 1 after the government introduced new taxes on these items. The price increase follows the implementation of additional excise duty on cigarettes and a health cess on pan masala, over and above the existing 40 percent Goods and Services Tax.
These changes replace the earlier GST compensation cess system that had been in place since GST was introduced in July 2017.
Why Prices Have Increased
Earlier, cigarettes, pan masala, and tobacco products were taxed under a combination of GST and compensation cess. This compensation cess was introduced to make up for revenue losses faced by states after GST came into force.
With the compensation loans almost fully repaid, the government has now ended the compensation cess mechanism and replaced it with fresh excise duties and a new health-related cess. This ensures that tax collection from these products continues without disruption.
New Excise Duty on Cigarettes Explained
Cigarettes are now taxed under the amended Central Excise Act. The excise duty depends on the length and type of cigarette.
Short non-filter cigarettes up to 65 mm will attract an excise duty of about ₹2.05 per stick. Short filter cigarettes of the same length will be charged slightly more, around ₹2.10 per stick.
Medium-length cigarettes measuring between 65 mm and 70 mm will now face an additional duty of roughly ₹3.6 to ₹4 per stick. Longer cigarettes in the 70 mm to 75 mm category will attract an excise duty of about ₹5.4 per stick.
A higher duty of ₹8.50 per stick has been set for unusual or non-standard cigarette designs. However, most commonly sold cigarette brands do not fall under this highest slab.
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Pan Masala and Smokeless Tobacco Tax Structure
Pan masala will now be taxed under the Health and National Security Cess Act. This cess is calculated based on the production capacity of manufacturing units rather than just sales value.
Even with this change, the government has kept the total tax burden on pan masala unchanged at 88 percent, including GST.
For other tobacco products, chewing tobacco and jarda scented tobacco will attract an excise duty of 82 percent, while gutkha will face a higher excise duty of 91 percent.
GST to Be Linked to Printed MRP
From February 1, a new MRP-based valuation system has been introduced for several tobacco products, including chewing tobacco, filter khaini, jarda scented tobacco, and gutkha.
Under this system, GST will be calculated based on the retail price printed on the product pack. This is meant to make tax calculation clearer and reduce the scope for under-reporting of prices.
New Rules for Manufacturers
Pan masala manufacturers are now required to apply for fresh registration under the Health and National Security Cess law.
Manufacturers of pan masala and certain tobacco products must also install working CCTV cameras covering all packing machines. The footage must be stored for at least 24 months.
They are required to inform excise authorities about the number of packing machines in use and their production capacity. If a machine remains non-functional for at least 15 continuous days, manufacturers can apply for a reduction in excise duty for that period.
How the Tax Money Will Be Shared
The excise duty collected on tobacco products will become part of the Centre’s overall tax revenue. As per Finance Commission recommendations, 41 percent of this revenue will be shared with states.
The cess collected from pan masala manufacturing units will also be passed on to states. This money will be used for health awareness programmes and other health-related activities.
GST Council’s Decision and Background
The move to impose excise duty on tobacco and cess on pan masala was approved by Parliament in December. The GST Council, which includes finance ministers from the Centre and all states, had agreed on this mechanism in September 2025.
When GST was launched on July 1, 2017, a compensation cess was introduced for five years to protect state revenues. This cess was later extended until March 31, 2026, to repay a loan of ₹2.69 lakh crore taken by the Centre to compensate states for revenue losses during the Covid period. The loan is scheduled to be fully repaid by January 31, 2026.
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