The government is examining multiple options to replace the existing compensation cess levied on tobacco products, as per a report by CNBC-TV8. According to CNBC-TV18 report discussions are currently underway between the Finance Ministry and the Prime Minister’s office, but no final decision has been taken yet.
The move comes at a time when authorities are evaluating ways to restructure taxation on tobacco without impacting revenue flows to the Centre.
Multiple options on table
According to CNBC-TV18, one option is to shift tobacco taxation outside the GST framework to ensure that revenue collections do not go into the divisible pool shared with states. Sources indicated that the government favours this approach.
Another proposal is to subsume the levy into the National Calamity Contingent Duty.
The government may also choose to introduce a brand-new cess on tobacco, or it could keep the existing tax in place but apply it under a different name.
Cess to continue until state loans repaid
On September 3, while announcing the GST rationalisation, the government said that GST on sin goods such as cigarettes, tobacco, cigars, cheroots and cigarillos would be increased to 40%. However, the implementation of the new rates was put on hold, and the compensation cess will continue until the government clears all loans taken to compensate states for revenue shortfalls.
Currently, tobacco attracts a 28% GST, along with a compensation cess ranging between 5% and 290%, depending on the type and product category.
CNBC-TV18 also reported citing sources that a replacement levy could be announced as part of the Union Budget for 2026.
Important to note that FICCI in its reports earlier in September warned that the new 40% slab for demerit goods, particularly tobacco, could encourage illicit markets. The report noted that between 2018–19 and 2022–23, the tax component of illicit tobacco rose from Rs 3,812 crore to Rs 16,168 crore, with its share in the illicit market rising from 15% to 54%.
