Government plans steep hike in excise on tobacco products

To prevent a revenue drop when the GST Compensation Cess expires (expected by March 2026), the government is proposing two new bills.

Written by Kuldeep Singh

November 30, 2025 18:05 IST

Government Proposes Massive Hike in Excise Duty on Cigarettes and Tobacco

The government has proposed to increase the central excise duty on tobacco and its products with sharper tax hikes for cigarettes containing tobacco and smoking mixtures for pipes and cigarettes. The move will ensure that once the Goods and Services Tax Compensation Cess outlives its utility and gets scrapped in a month or two, the tax incidence on these productions remain the same, and revenues don’t fall.

The ministry of finance will introduce the Central Excise (Amendment) Bill 2025 in Lok Sabha on Monday with this purpose, sources said.

New ‘Health & National Security’ Cess on Pan Masala Production

Separately, the government will also table the “Health Security se National Security Cess Bill, 2025:, in the Lok Sabha on Monday to levy a cess on the machines installed or processes undertaken by which the specified goods. These include pan masala, manufactured or produced, whether manually or through hybrid processes. The cess will have the twin purposes of enabling targeted utilisation for public health, as well as national security.

Sharper Excise Duty Hikes to Maintain Revenue Post-Cess

As per the new Excise Bill, the government has proposed a rate of Rs 11,000 per thousand sticks for filter cigarettes above 75mm length from the existing Rs 735. For the non-filter cigarettes (65-70mm), the duty has been proposed 18 times higher to Rs 4500 per thousand sticks from Rs 250. The smoking mixtures for pipes/cigarettes will attract 325% duty from the existing 60%.

The Bill seeks to replace the existing excise duty rates on tobacco products, which were kept low since the rollout of GST in 2017. The rates of central excise duties were reduced significantly to allow for the levy of the compensation cess without large impact on tax incidence.

The compensation cess was introduced to persuade states to adopt the Goods and Service Tax regime by guaranteeing them a 14% annual revenue growth for five years from the July 2027 start of GST. To fund the compensation and a shortfall that occurred, a cess is still levied on luxury and sin goods such as tobacco products and certain motor vehicles. Originally scheduled to end in June 2022, the cess was extended till March 2026 to repay loans taken by the Centre to support states during the revenue shortfall caused by the COVID-19 pandemic. It is believed that even a month or two before March, the loans will be fully repaid with the cess proceeds.

The government stated that the compensation cess levied on tobacco and tobacco products will be discontinued once all borrowings taken during the Covid-19 period are repaid, expected by March 2026.

“This amendment is imperative to give the government fiscal space to increase the rate of central excise duty on tobacco and tobacco products so as to protect tax incidence,” a government source said.

In September, the GST was streamlined by converting a multi-tier structure of 5%, 12%, 18%, and 28% into just two slabs of 5% and 18%, with a special 40% tax for demerit goods like tobacco and luxury vehicles. The consolidation lowered prices for daily-use products, and covered a total of 375 items across sectors like fast-moving consumer goods, automobiles, electronics, and pharmaceuticals. While the changes came into force on September 22 for most of the items, the tobacco products were kept out of the ambit of the new structure. These products still attract 28% GST along with cess and other duties.