The Ministry of Finance on Wednesday issued a notification announcing discontinuation of the Goods and Services Tax (GST) compensation cess on tobacco and related products effective February 1, marking the end of a temporary levy introduced in 2017 to offset state revenue losses during the GST rollout and extended to repay Covid-era borrowings.
A separate Health Security and National Security Cess has been introduced on pan masala and related items to maintain high taxation levels, with proceeds earmarked for public health initiatives and national security will also come into effect from February 1.
The compensation cess, which had been applied on sin goods like cigarettes, chewing tobacco, pan masala, gutkha, bidis, and hookah tobacco, ceased to exist as the Centre is scheduled to complete repayment of Rs 2.69 lakh crore in loans, including interest, taken to compensate states during the pandemic.
Tax mix tweaked to retain levy on demerit goods
To prevent any reduction in the overall tax burden on these demerit goods and, the government has shifted taxation to a combination of the existing 40% GST slab (introduced under GST reforms in September 2025) and enhanced central excise duties.
The Central Excise (Amendment) Act, 2025, passed by Parliament in early December, empowers higher duty on cigars / cheroots / cigarettes in the range of Rs 5,000-11,000 per 1,000 sticks depending on the length. Also, a duty of 60-70% on unmanufactured tobacco and 100% levy on nicotine and inhalation products. This duty will be over and above the 40% GST rate that would be applicable on sin goods.Currently, tobacco and pan masala attract 28% GST, plus a compensation cess.
Five year GST compensation cess
At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.
The levy of compensation cess was later extended by four years till March 31, 2026, and the collection is being used to repay the loan that the Centre took to compensate states for the GST revenue loss during the Covid period. On September 3, 2025, the GST Council had decided to continue with the compensation cess on tobacco and pan masala till the loans taken are repaid.