India Implements New Tobacco Tax Regime from February 1, 2026

Comprehensive Overhaul of Tobacco Taxation

The Indian Ministry of Finance has officially notified a new taxation regime for tobacco products, set to come into effect from February 1, 2026. This significant restructuring follows parliamentary approval in December of two Bills, aiming to streamline the tax framework for 'sin goods' while addressing public health concerns and ensuring stable revenue streams. The new system replaces the existing Goods and Services Tax (GST) compensation cess, which is scheduled to cease on January 31, 2026, upon the full repayment of loans taken to compensate states for GST revenue losses during the COVID-19 pandemic.

Key Changes in Duties and Cesses

Under the revised regime, a combination of new excise duties and a dedicated cess will be levied on various tobacco products, over and above the applicable GST rates. The changes are designed to maintain a high tax incidence on products deemed harmful to public health.

• GST Rates: Most tobacco products, including cigarettes, pan masala, and chewing tobacco, will now attract a 40% GST rate. However, biris will continue to be taxed at a lower 18% GST rate.
• Excise Duties: Additional excise duties have been introduced for various tobacco products. For cigarettes, the duty will range from ₹2,050 to ₹8,500 per 1,000 sticks, depending on their length and filter type. Chewing tobacco and jarda scented tobacco will face an 82% excise duty, while gutkha will attract a 91% duty. Pipe and cigarette smoking mixtures will see a substantial 279% duty. To protect workers in the sector, handmade bidis will have a lower duty of ₹1 per thousand.
• Health and National Security Cess: A new Health and National Security Cess will be specifically levied on pan masala manufacturing. This cess is intended to create a non-lapsable and predictable revenue stream for long-term security preparedness and capacity building.

The Ministry of Finance also notified the 'Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026,' which lay down the mechanism for assessing production capacity and collecting duty from manufacturers.

Rationale and Industry Reaction

Government sources indicate that the hike in excise duty on cigarettes aims to ensure that these products carry a tax burden proportionate to their severe public health impact, aligning with international best practices. The move also seeks to simplify India's indirect tax structure.

However, the announcement has drawn criticism from industry stakeholders. The Federation of All India Farmer Associations (FAIFA) expressed concerns that the additional excise duty on tobacco products could hurt farmers' incomes and exacerbate smuggling, arguing that it contradicts government assurances of revenue-neutral tax reform. FAIFA President Murali Babu stated, 'We are shocked to see that the promise has not been kept, and instead a sharp increase in taxes has been notified, at the cost of farmers' livelihoods.' The Tobacco Institute of India (TII) also voiced its surprise at the 'unprecedented increase in duty'.