Sin Goods: Cigarette, Beedi, Pan Masala To Be Costlier From Feb 1

New Delhi: An additional excise duty on tobacco products and a health cess on pan masala will be levied from February 1, replacing the existing goods and services tax (GST) compensation cess levy on such ‘sin goods’. A health and national security cess and excise duty on pan masala and tobacco products respectively will be over and above 40 per cent goods and services tax (GST) rate, while in case of biris, it would be on top of the 18 per cent GST rate effective February 1, 2026, according to the finance ministry notifications.

However, the sources familiar with the development said that the hike in duty on even cigarettes would ensure that such sin goods carry a tax burden proportionate to their severe public health impact, and also align with global best practices in tobacco taxation. “At the same time, the combination of GST and the machine-capacity-based cess levy on pan masala manufacturing will create a comprehensive tax architecture that improves detection of evasion and protects tax revenue,” sources said.

It is noted that globally, more than 80 countries revise tobacco taxes annually, many using inflation-indexing or multi-year excise schedules. “Prior to the GST roll-out, even in India, excise rates on cigarettes were increased annually. In the global context, India's seven-year pause in revising basic excise duty and cess rates stands out as an outlier. Without periodic adjustments, the public-health impact of tobacco taxation diminishes sharply, the sources said.

A new maximum retail price or MRP-based valuation mechanism has been introduced for tobacco products, including chewing tobacco, filter khaini, jarda scented tobacco, gutkha and others alike whereby the GST value shall be determined based on the retail sale price declared on the package. “An additional excise duty of 91 per cent on gutkha, 82 per cent on chewing tobacco, and 82 per cent on jarda scented tobacco will be levied,” the government said.

In the case of cigarettes, it will depend on its length and filter, which will be taxed in the range of Rs 2,050-Rs 8,500 per 1,000 sticks. The proceeds from excise duty will be redistributed among states in accordance with the finance commission's recommendations. The Centre’s tax revenues form part of the divisible pool, and 41 per cent of it is shared among the states. “The government’s move on cigarettes will ensure that cigarettes continue to carry a tax burden proportionate to their severe public-health impact, while simultaneously preserving fiscal stability and aligning with empirical global best practices in tobacco taxation,” the sources said.

As per the World Bank estimates, India's total tax incidence on cigarettes is approximately 53 per cent of the retail price, which is substantially lower than the World Health Organization's recommended benchmark of 75 per cent or more for achieving meaningful reductions in tobacco consumption. “The current tax burden on cigarettes in India is neither excessive nor misaligned with global public-health standards,” the sources said.

Besides, the health cess will be levied on the production capacity of pan masala manufacturing units. However, the government said a part of the revenue from this cess will be shared with states through health awareness or other health-related schemes/activities. The finance ministry has also notified the chewing tobacco, jarda scented tobacco and gutkha packing machines (capacity determination and collection of duty) Rules, 2026. “The main purpose of this health cess is to create a ‘dedicated and predictable resource stream’ for two domains of national importance, health and national security,” finance minister Nirmala Sitharaman had said in Parliament last month.

However, sources said that the triangulation of two data sets of value and capacity trail by way of GST and cess levy, respectively, will significantly reduce the scope for evasion in sectors such as pan masala and smokeless tobacco, which have historically been prone to under-reporting, valuation disputes, and clandestine production. It is, however, expected that the GST on retail sale price will provide the value trail as to how much was sold, at what price. “When these datasets are analysed together, supported by CCTV footage, surprise verification, chartered engineer-certified machine parameters, and risk-based analytics, the probability of tax leakage reduces drastically,” the sources added.