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FM: Tobacco excise duty will be shared with states

Lok Sabha passes Bill; Opp says step to fill fiscal hole

3 min readNew DelhiDec 4, 2025 04:07 AM IST

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Union Finance Minister Nirmala Sitharaman in LS, Wednesday. PTI

The Lok Sabha passed the Central Excise (Amendment) Bill on Wednesday to levy excise duty on tobacco and related products, with Finance Minister Niramala Sitharaman saying that the revenue collected will be part of the divisible pool, and 41% of that will be shared with the states.

The new Bill will ensure that tax incidence on demerit items does not fall. “Now, certainly, we don’t want cigarettes to become affordable,” she said.

“This is not a new law, and not an additional tax, and not something the Centre is taking away. This is not a cess, this is excise duty. It existed before GST. It has come back to the Centre because it gave it away at the time to collect compensation cess. Now, reverting it to the Centre to be collected as excise duty which will go to the divisible pool. It is going to be redistributed again at 41% which has to go to states. So, this is not a cess,” she said while replying to the debate on the Bill in the Lok Sabha. The Bill was passed by the House through voice vote.

Earlier in the day, introducing the Bill for consideration, Sitharaman said the levy of excise on tobacco will ensure tax incidence on the demerit goods remains the same even after the expiry of the GST compensation cess. Sitharaman said since the GST law caps maximum rate of tax at 40%, the ultimate tax incidence on tobacco after removal of GST cess would come down from the current level if excise duty is not levied.

“To ensure the incidence is not lower than what it was during GST with the compensation cess, we are bringing this excise duty. In a way, we are saying cigarettes should not become affordable now because incidence has become less,” she said.

A total of 28 members took part in the discussion, with several Opposition MPs criticising the Bill. Congress member Sasikanth Senthil said the intent of the legislation is to fill a “fiscal hole” created by the “failed GST implementation and irresponsible borrowing” by the government.

“The major issue I am opposing in this Bill relates to the broader GST landscape, where states are repeatedly being ignored, compensation dues are chronically delayed, rate decisions are driven by political compulsions and not economic logic, and rate inversions are causing chaos for MSMEs. The entire GST, which is supposed to be a cooperative federal structure, is not running the way it should be,” Senthil said.

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Congress MP Karti Chidambaram said larger goal should be a clear roadmap for reducing tobacco use and shifting workers to alternative livelihoods. SP member Naresh Uttam Patel raised concerns of bidi-rollers, leaf-pluckers and small supari growers.

TMC MP Saugata Roy asked whether fiscal tools alone could curb tobacco consumption. Citing Bihar’s liquor prohibition policy, he said CM Nitish Kumar “lost revenue but took a bold decision”, though illicit liquor remained a concern. “Now, same question is if the Finance Minister can show courage,” he said, adding that the government must explain what would happen to tobacco workers.

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