Union Ministry of Finance notified a new taxation framework for tobacco and pan masala products to take effect from February 1, 2026, replacing the GST compensation cess regime.• The Ministry of Finance issued multiple notifications on January 1, 2026 to operationalise the new taxation regime for tobacco products. The Central Excise (Amendment) Act, 2025 will come into force from February 1, 2026, introducing revised excise duty rates on tobacco products. Provisions of the Health and National Security Cess Act, 2025 relating to pan masala manufacturing will also take effect from the same date. February 1, 2026 has been notified as the date from which the GST compensation cess will cease to exist.The compensation cess was originally introduced for five years to compensate States for GST-related revenue loss and was extended till 2026 due to COVID-19-related shortfalls.With the repayment of GST compensation loans nearing completion, the cess has been fully withdrawn from all goods, including tobacco products.

Key Features of the New Tobacco Tax Regime

¨     Post-cess fiscal restructuring: The GST compensation cess is replaced with a combination of higher GST rates, additional excise duty, and a new health and national security cess.

¨     A Health and National Security Cess will be levied on pan masala, while tobacco products will attract additional excise duty over and above GST.

¨     Strengthening deterrence through specific taxation: The excise duty structure has been revised to maintain a high overall tax incidence after the withdrawal of the compensation cess.

¨     Gutkha: highest excise duty of about 91 percent

¨     Chewing tobacco and jarda scented tobacco: attract around 82 percent duty

¨     Cigarette: excise duty rates vary by length and filter type and range from ₹2,050 to ₹8,500 per thousand sticks.

¨     Pipe and cigarette smoking mixtures: attract an exceptionally high excise duty of 279 percent.

¨     Handmade bidis have been given concessional treatment with a duty of ₹1 per thousand sticks to protect the livelihoods of workers.

Valuation and Production-Based Taxation

¨     A new valuation mechanism has been introduced for smokeless tobacco based on the retail sale price declared on the package.

¨     For chewing tobacco and gutkha manufacturers, excise duty will be linked to the number and speed of packing machines.

Compliance and Monitoring Measures

¨     Manufacturers are required to install functional CCTV systems covering all packing and production areas.

¨     CCTV footage must be preserved for a period of 48 months to enable audit and enforcement.

¨     All manufacturers must file a detailed declaration of production capacity and machine specifications in Form CE DEC-01 by February 7, 2026.

¨     Machine speed and technical specifications must be certified by a Chartered Engineer through Form CE CCE-01.

¨     Export of notified tobacco products will be permitted only after payment of applicable duties.

Rationale Behind the Policy Shift

¨     Correcting Regressive tax outcomes: Lower specific excise duties under GST made cigarettes relatively more affordable, particularly for low-priced segments, diluting public health objectives.

¨     Alignment with WHO–FCTC recommendations: The new regime aligns with global public health guidance that recommends periodic increases in specific excise duties.

¨     The World Health Organization Framework Convention on Tobacco Control (WHO-FCTC) requires countries to implement legally binding, evidence-based measures to reduce tobacco demand and supply.

¨     National priorities: The Health and National Security Cess has been justified as a dedicated and non-lapsable funding source for national security needs.

¨     Administrative simplification for enforcement agencies: CCTV mandates and machine-linked taxation improve monitoring efficiency and reduce litigation over valuation disputes.