Lok Sabha Passes Central Excise (Amendment) Bill, 2025, to Hike Tobacco Duties

Parliament Approves New Tobacco Taxation Regime

The Lok Sabha, India's lower house of Parliament, on December 3, 2025, passed the Central Excise (Amendment) Bill, 2025. This significant legislative action aims to restructure the taxation of tobacco and related products by levying higher excise duties, particularly as the Goods and Services Tax (GST) compensation cess is phased out. The bill, introduced on December 1, 2025, amends the Central Excise Act, 1944, to ensure fiscal stability and discourage the consumption of 'sin goods'.

Transition from GST Compensation Cess

The passage of this bill is a direct response to the impending discontinuation of the GST compensation cess, which was initially introduced in 2017 to offset revenue losses for states following the implementation of GST. While originally set to expire in June 2022, the cess was extended until March 31, 2026, to facilitate the repayment of loans taken during the COVID-19 pandemic to compensate states. Finance Minister Nirmala Sitharaman clarified during the debate that the new measure is not an additional tax but rather a reversion to an excise duty mechanism that existed prior to GST. She stated that the loans would likely be repaid within 'a couple of weeks' from the bill's passing. The revenue generated from these excise duties will be part of the divisible pool, with 41 percent being devolved to the states.

Revised Duty Structure and Public Health Goals

The Central Excise (Amendment) Bill, 2025, introduces substantial increases in excise duties across various tobacco products. Key revisions include:

• Unmanufactured tobacco (e.g., sun-cured leaves): Duty increased from 64 percent to 70 percent.
• Cigarettes: Duties will now range from ₹2,700 to ₹11,000 per thousand sticks, a significant hike from the previous ₹200-₹735 range, depending on length and filter.
• Chewing tobacco: Duty quadrupled from 25 percent to 100 percent.
• Hookah or gudaku tobacco: Duty increased from 25 percent to 40 percent.
• Smoking mixtures for pipes and cigarettes: Duty raised from 60 percent to 325 percent.

These new excise rates will be applied in addition to the existing 40 percent GST rate on such products. The government's rationale, as articulated by Finance Minister Sitharaman, is primarily driven by public health concerns, aiming to deter tobacco consumption through higher prices. Efforts are also underway to encourage tobacco farmers to diversify their crops, with over 1.12 lakh acres having been shifted from tobacco cultivation between 2018 and 2022.

Concerns and Future Outlook

During the parliamentary debate, some members raised concerns regarding the potential impact of these increased duties on the livelihoods of tobacco farmers and workers. There were also apprehensions about a possible rise in counterfeiting and black market activities if the tax hikes are too steep. Members called for a comprehensive transition plan for workers in the tobacco industry and suggested referring the bill to a select committee for further review. Concurrently, the Lok Sabha also passed the Health and National Security Cess Bill, 2025, which will levy a cess on pan masala and other specified goods, with collections earmarked for public health initiatives and national security. This dual legislative approach underscores India's commitment to maintaining high taxation on 'sin goods' for both revenue generation and public welfare.