Smokers will have to pay more for cigarettes from February 1, as the Centre rolls out a new excise duty regime based on cigarette length, along with a health cess on pan masala and tobacco products. The move marks the first major tax increase on cigarettes in nearly seven years and aligns India’s tobacco taxation closer to global public health norms.The new levies approved by Parliament in December will replace the existing GST compensation cess framework that has been in place since the rollout of the Goods and Services Tax (GST) in July 2017.
What changes from February 1
From next month, cigarettes and tobacco products will attract additional excise duty and cess over and above the highest 40% GST slab. This replaces the current structure of 28% GST plus compensation cess.The Central Excise Act has been amended to impose per-stick excise duty on cigarettes, with rates varying by length.
How much more will cigarettes cost?
The increase in cigarette prices will vary depending on the length and type of cigarette. Under the new tax structure, short non-filter cigarettes measuring up to 65 mm will attract an additional excise duty of around Rs 2.05 per stick, while short filter cigarettes of the same length will be taxed slightly higher at about Rs 2.10 per stick.For medium-length cigarettes (65–70 mm), the additional duty will be in the range of Rs 3.60 to Rs 4 per stick. Long and premium cigarettes measuring 70–75 mm will see a steeper increase, with an added duty of around Rs 5.40 per stick.The highest levy of Rs 8.50 per stick has been reserved for cigarettes with unusual or non-standard designs. Officials have clarified that most popular cigarette brands do not fall under this top slab, meaning the sharpest hike will apply only to a limited category of products.
New Excise Rates Effective February 1
Source: Ministry of Finance
New rules for tobacco and pan masala products
Also from Feb 1, a new MRP-based valuation mechanism will also come into force for chewing tobacco, khaini, jarda, and gutkha. GST will now be calculated based on the retail sale price printed on the pack, rather than manufacturing cost.Pan masala manufacturers will need to:
- Apply for fresh registration under the health and national security cess law
- Install CCTV cameras covering all packing machines
- Preserve footage for at least 24 months
- Declare the number and capacity of machines to excise authorities
Manufacturers can claim abatement in excise duty if a packing machine remains non-functional for at least 15 consecutive days.The health and national security cess on pan masala will be levied based on manufacturing capacity, while keeping the overall tax burden at 88%, including GST.According to Crisil Ratings, the domestic cigarette industry is likely to see a 6–8% contraction in volumes in the next financial year following the tax hike.Chewing tobacco and jarda scented tobacco will attract an excise duty of 82%, while gutkha will face a higher levy of 91%.
Why were taxes raised now?
Excise duty collections from tobacco products will form part of the divisible pool of central taxes, with 41% shared with states as per Finance Commission recommendations.Proceeds from the pan masala cess will be channelled to states through health awareness and health-related programmes.Finance minister Nirmala Sitharaman had earlier said in Parliament that the cess is aimed at creating a “dedicated and predictable resource stream” for two domains of national importance – health and national security.Another key reason is that taxes on cigarettes in India had remained unchanged since the rollout of GST in July 2017, a seven-year freeze that stood in sharp contrast to global best practices, PTI reported.International public health guidelines recommend regular increases in tobacco taxes to ensure cigarette prices rise faster than incomes, thereby discouraging consumption.According to World Bank estimates, India’s total tax incidence on cigarettes is currently around 53% of the retail price, significantly below the World Health Organization’s recommended benchmark of at least 75% for achieving meaningful reductions in tobacco use.In comparison, countries such as the United Kingdom and Australia tax cigarettes at 80–85% of the retail price, while France, New Zealand and several European Union nations maintain tax levels exceeding 75–80 per cent. Even middle-income countries like Turkiye, South Africa, the Philippines and Chile have, over the past decade, raised cigarette taxation to levels that meet or surpass the WHO benchmark.The latest tax hike, therefore, marks India’s attempt to realign its tobacco taxation framework with global norms, while also generating targeted revenues for critical national priorities.The new tax regime follows a decision taken by the GST Council in September 2025 to impose excise duty on tobacco products and a cess on pan masala once the GST compensation cess comes to an end.The compensation cess introduced in 2017 to offset states’ revenue losses will cease after the repayment of Rs 2.69 lakh crore in loans taken during the Covid period. Initially meant to run for five years until June 2022, the levy was later extended by four years till March 31, 2026, with collections used to repay loans taken by the Centre during the Covid-19 period.The repayment is scheduled to be completed by January 31, 2026.
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