GST Rate and Compensation Cess on Tobacco: The GST Council, in its 56th meeting on Wednesday, decided that the new GST rates on goods and services will come into effect from September 22, 2025.
However, for items like cigarettes, chewing tobacco, zarda, unmanufactured tobacco, and beedis, the current GST rates and compensation cess will continue for now. The new rates for these products will only be introduced later, once the government clears all its loans taken to compensate states against their revenue shortfall.
GST on Tendu and Tobacco leaves
The GST rate on tendu leaves has been cut to 5%, similar to what 5% rate is already there for tobacco leaves. The Centre, in its GST FAQ doc mentioned that the Tendu leaves are considered a minor forest produce.
Clarification around GST on tobacco and related products
Goods like tobacco and related products will stay under the current GST rate, along with the additional cess, until the government clears the loans it had taken during the pandemic to make up for states’ revenue losses, Finance Minister Nirmala Sitharaman said on Wednesday.
She explained that pan masala, cigarettes, gutkha, zarda, unmanufactured tobacco and beedis will continue with the existing GST and cess until all loan and interest payments are finished. After that, these products will no longer face cess but will instead be taxed at a flat 40% GST rate.
Sitharaman did not give an exact date for when the loans would be paid back but she said that it should happen “well within this calendar year.” The GST Council has also authorised her to end cess collections immediately once the loan is fully repaid.
Which loan is Centre supposed to repay?
The Central government, during the pandemic years, borrowed Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore to cover shortfalls in cess collections. According to the 2025-26 Union Budget, the government plans to collect Rs 1.67 lakh crore in compensation cess this year, of which Rs 67,500 crore will go toward repaying of these loans. Earlier, repayments of Rs 78,104 crore in 2023-24 and Rs 1.24 lakh crore in 2024-25 had already been made.
The GST Council has also approved a two-tier rate system of 5% and 18%, with Sitharaman stressing that the changes were made keeping the common man in mind. She said everyday items had been carefully reviewed and, in most cases, their tax rates were significantly reduced.
While economists had warned that the government could face a large revenue shortfall, Finance Ministry officials argued otherwise. Revenue Secretary Arvind Shrivastava said the estimated impact of the rate changes was about Rs 48,000 crore based on 2023-24 consumption data. But he avoided calling it a “loss,” saying the move would remain fiscally sustainable due to better compliance, more buoyant consumption, and changes in buying behaviour.
On the question of how the changes could affect GDP, Sitharaman said it was too early to measure. “Once we have a couple of months of data, we can assess it,” she said, but added that she expects the impact to be “very positive.”