India’s Tobacco Taxation Reforms – Explained

Tobacco Taxation Latest News

• India has notified a new taxation regime for tobacco and related sin goods, effective February 1, following legislative changes approved by Parliament.

Taxation on Tobacco and Sin Goods in India

• Sin goods such as tobacco, pan masala, and alcohol are taxed heavily in India due to their adverse public health and social impacts. 
• Tobacco taxation serves a dual policy purpose: discouraging consumption through higher prices and generating revenue for public expenditure, particularly in health and social security.

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Structure of Tobacco Taxation in India

• India follows a multi-layered taxation framework for tobacco products, involving:
  • Goods and Services Tax (GST)
  • Central Excise Duty
  • Cess (earlier GST Compensation Cess, now replaced for tobacco)
• Under GST, tobacco products have always been placed in the highest tax slabs due to their classification as demerit goods. 
• However, despite high nominal tax rates, tobacco products, especially cigarettes, remained relatively affordable for consumers over the past decade.

Public Health Rationale

• Global public health bodies, including the WHO, recommend that tobacco prices should rise faster than income growth to reduce affordability and consumption. 
• In India, stagnation in effective excise duties meant that real prices of cigarettes did not rise sufficiently, weakening tobacco control efforts.

Revenue Considerations

• Historically, tobacco has been a major contributor to indirect tax revenues. 
• The GST Compensation Cess, introduced in 2017, was meant to compensate States for revenue losses due to GST implementation. 
• While it ended for most goods, tobacco remained one of the last items subjected to this cess, reflecting both its revenue potential and public policy priority.

Shift Towards Purpose-Specific Cess

• The recent reform reflects a shift from a general compensation-oriented cess to a dedicated, non-lapsable cess, designed to ensure predictable funding without raising broad-based taxes. 
• This approach aligns fiscal objectives with sector-specific policy needs, particularly national security and long-term preparedness.

News Summary

• The Union Finance Ministry has notified a comprehensive restructuring of tobacco taxation, effective February 1, following the passage of the Central Excise (Amendment) Act, 2025.
• This marks one of the most significant overhauls of tobacco taxation since the introduction of GST.

End of GST Compensation Cess

• The GST compensation cess on tobacco products will cease from February 1, as the original objective of compensating States for GST-related losses has largely been met. 
• The cess had already been extended beyond its original timeline due to pandemic-induced revenue shortfalls.

Introduction of New Excise and Cess Framework

• To replace the compensation cess, the government has introduced:
  • Revised central excise duties on tobacco products
  • A new cess under the Health Security-cum-National Security Act, 2025, applicable to pan masala and related units
• This new cess is designed to create a non-lapsable and predictable revenue stream, particularly for long-term security preparedness and capacity building, without increasing the tax burden on the general population.

Revised GST Slabs

• Significant changes in GST rates include:
  • Beedis shifted to the 18% GST slab from the earlier 28% category
  • All other tobacco products, including cigarettes and chewing tobacco, moved to a 40% GST slab
• These changes are aimed at simplifying the tax structure while ensuring higher effective taxation on products with greater health risks.

New Valuation Mechanism

• For smokeless tobacco products such as gutkha, khaini, jarda, and chewing tobacco, GST valuation will now be based on the retail sale price (RSP) declared on packaging. 
• This is expected to curb under-reporting and tax evasion, a persistent issue in the tobacco sector.

Significance

• The reform aligns India’s tobacco taxation closer to global public health guidance by:
  • Increasing the real prices of tobacco products
  • Reducing affordability over time
  • Strengthening enforcement through clearer valuation rules
• At the same time, it ensures fiscal stability by replacing a temporary cess with a purpose-specific, long-term revenue instrument.

Source: TH | TOI