From February 1, 2026, India will impose additional excise duty on cigarettes and other tobacco products, along with a dedicated health and national security cess on pan masala. These levies will apply over and above the existing 40% GST rate, replacing the earlier structure of 28% GST plus compensation cess that has been in place since the GST rollout in July 2017.

The new framework introduces an MRP-based valuation for chewing tobacco, filter khaini, jarda scented tobacco and gutkha, where GST will be calculated on the declared retail sale price. Pan masala manufacturers must obtain fresh registration under the cess law, install functional CCTV systems at all packing machines, retain footage for 24 months, and report machine details to excise authorities. Abatement in duty will be allowed if a machine remains non-functional for at least 15 consecutive days.

Excise duty on cigarettes will vary by length: short non-filter cigarettes (up to 65 mm) face about Rs 2.05 per stick, short filter variants Rs 2.10, medium-length (65-70 mm) Rs 3.6-4, long premium (70-75 mm) around Rs 5.4, and non-standard designs up to Rs 8.50 per stick. Chewing tobacco will attract 82% excise duty and jarda scented tobacco/gutkha 91%. The overall tax burden on pan masala, including 40% GST, will remain at the current 88% level, with cess tied to production capacity.

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The changes follow the end of the GST compensation cess mechanism on January 31, 2026, after repayment of Rs 2.69 lakh crore in Covid-era loans to states. Proceeds from tobacco excise will be shared with states per Finance Commission norms, while pan masala cess funds will support health awareness and national security schemes. Finance Minister Nirmala Sitharaman had described the cess as a predictable resource stream for these priority areas.

Experts predict significant impact on the cigarette industry. Crisil Ratings forecasts a 6-8% volume drop in the next fiscal year due to the higher duties. India’s current cigarette tax incidence stands at about 53% of retail price—well below the World Health Organization’s recommended 75% or more—while many countries including the UK, Australia and several EU nations tax at 80-85%.

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