Cigarettes to turn 15-40% more expensive from February 1

The stock markets took note of the higher tax incidence with share prices of cigarette makers ITC and Godfrey Phillips India plummeting almost 10 per cent and 17 per cent, respectively, on the National Stock Exchange.

The imposition of additional duties over and above the 40 per cent slab under GST 2.0 marks a transition from the earlier compensation cess levy under the original GST regime.

The duty structure on cigarettes is complex. As it exists now, the total duties could be broken down into four parts: basic excise duty of Rs 5-10 per 1,000 sticks, National Calamity Contingent Duty (NCCD) of Rs 230-850 per 1,000 sticks, GST of 28 per cent, and a compensation cess. The compensation cess had two components: an ad valorem levy ranging from 5-36 per cent and a flat levy ranging Rs 2,076-4,170 per 1,000 sticks. In general, filters and longer cigarettes attracted higher duties, and cigars, cheroots and cigarillos, the highest.

From February 1, the compensation cess component will be knocked out. This has been more than made up by a higher GST rate of 40 per cent, and excise duties ranging from Rs 2,050-8,500 per 1,000 sticks. The NCCD remains the same as earlier.

Finance Ministry sources said the affordability of cigarettes has either stagnated or increased in the past decade, implying cigarettes have not become more expensive relative to consumers’ purchasing power, which is contrary to global public-health guidance. Globally, more than 80 countries revise tobacco taxes annually, many using inflation-indexing or multi-year excise schedules, they said.

Finance Ministry sources said India’s current rate remains modest, leaving considerable fiscal and public-health space for calibrated increases without departing from global norms. Citing a World Bank article from July 2025, they said India’s total tax incidence on cigarettes is approximately 53 per cent of the retail price, falling significantly short of the 75 per cent rate recommended by the World Health Organization.

The Tobacco Institute of India, a representative body of farmers, manufacturers, exporters, and ancillaries of the cigarettes’ segment of the domestic tobacco industry incorporated in 1992 by ITC, Godfrey Phillips India, and VST Industries, said in a statement it was “shocked and surprised to note the unprecedented increase in duty” given the statements made by the government that the overall impact will be revenue neutral.

For every three legal cigarettes, one smuggled or illicit cigarette is sold in the country and this high tax increase will further boost illegal and illicit activity, it said. “Cigarettes are already a highly taxed product in the country. Legal cigarettes constitute only 10 per cent of the total tobacco consumption while contributing 80 per cent of tobacco tax revenue,” it said, asking the government to review the computations.

Apart from cigarettes and other tobacco products, paan masala, too, will attract a 40 per cent GST rate. In addition, paan masala (without tobacco) will also attract a ‘Health Security se National Security’ (HSNS) cess. There is no HSNS cess on paan masala with tobacco.

“The GST Council decided to increase the GST rate on paan masala from 28 per cent to the statutory ceiling of 40 per cent, and therefore the remaining portion of the existing tax burden is being shifted to the machine-based cess under the Health Security se National Security Cess Bill, 2025,” an official said. The calibrated rates under the cess ensure that the combined incidence of GST and the new cess remains broadly equivalent to the current incidence of GST plus compensation cess, the official said.

As per the current GST structure for paan masala, a GST rate of 28 per cent was levied along with a cess of 60 per cent (before April 1, 2023), taking the total levy to 88 per cent. Now, with the new Health Security se National Security cess, and a 40 per cent GST rate, the total levy on paan masala (without tobacco) is proposed to be maintained at 88 per cent, Finance Ministry sources said. The HSNS cess levy will not be based on actual production, it will be payable on a monthly basis from February 1 based on the number of packing machines installed and their maximum packing speed, not the actual operating speed.

For chewing tobacco (including filter khaini), jarda scented tobacco and gutkha (paan masala with tobacco), when manufactured with the aid of a packing machine and packed in pouches, the central excise duty will be levied on the basis of capacity of production. The excise duty rate has been notified to be 82 per cent for chewing tobacco and jarda scented tobacco, and 91 per cent for gutkha (paan masala with tobacco).

The manufacturer of chewing tobacco, jarda and gutkha will be required to pay the duty based on the determined annual capacity of production. However, pending verification of the declaration filed, the manufacturer will have to pay the duty based on the retail sale prices of the pouches manufactured and the maximum rated speed, in pouches per minute, of the packing machine.

For instance, if the maximum rated capacity of the machine producing chewing tobacco (also for jarda scented tobacco) is 500 pouches and the retail sale price is Rs 2, the rate of duty per packing machine per month will be Rs 0.83 crore. For machines producing gutkha up to 500 pouches per minute, a duty of Rs 0.92 crore will be levied.

If the maximum rated capacity of the machine producing chewing tobacco is 500 pouches and the RSP is Rs 4, the rate of duty per packing machine per month will be Rs 1.52 crore (higher of Rs 0.83 crores or 0.38*RSP).

For other tobacco products, the excise duty on hookah has been notified to be 33 per cent, while a rate of 60.5 per cent has been notified for homogenised tobacco, preparations containing chewing tobacco and snuff. Smoking mixtures for pipes and cigarettes will attract 279 per cent duty.

Finance Ministry sources said both paan masala and tobacco are evasion-prone, machine-driven sectors where actual production is difficult to measure, and therefore a capacity-linked levy is better. GST provides the value trail by showing how much was sold and at what price, while cess provides the capacity trail by telling how much could have been produced, the sources said.

Last month, the government introduced two legislations in Parliament to bring in higher excise levy on tobacco and related products, and the ‘Health Security se National Security Cess’ on paan masala.

The levies have been brought in as the GST compensation cess is set to lapse after March 2026. Under GST, as per the Goods and Services Tax (Compensation to States) Act, 2017, states were guaranteed compensation at the compounded rate of 14 per cent from the base year 2015-16 for losses arising due to implementation of the taxation regime for five years since its rollout.

While the five-year compensation period ended in June 2022, the government had notified the extension of the levy and collection of compensation cess until March 2026 for repayment of loans meant to compensate states for the five-year period since the July 2017 rollout.