The Centre issued an order on Wednesday to implement a new health and national security cess on tobacco and related products, replacing the GST compensation cess, with effect from 1 February.
At the same time, the government formally withdrew the GST compensation cess on tobacco products from the same date.
Centre Replaces GST Compensation Cess With Health and National Security Cess on Tobacco From February 1
This change indicates that tobacco products will now be taxed under a new structure that includes excise duty, 40% GST, and the health and national security cess.
As part of this restructuring, the earlier 28% GST slab and the compensation cess on tobacco are being discontinued.
The government’s stated intent is to keep the overall tax burden on tobacco and similar harmful products broadly at the current high levels, even after the compensation cess is removed.
The GST compensation cess is being discontinued because it has outlived its original purpose.
The new tax framework is being rolled out through two new laws passed by Parliament in the winter session: the Central Excise Amendment Act, 2025, and the Health and National Security Cess Act, 2025.
A separate order relating to excise duty is expected to follow.
The Central Excise (Amendment) Act, 2025 proposes an increase in excise duty on tobacco products.
For instance, excise duty on tobacco is set to rise from 64% to 70% once the amendment is implemented.
Unlike cess collections, revenues from taxes such as GST, income tax, and excise duty are shared between the Centre and the states.
India’s Tobacco Taxes Fall Short of World Health Organization Benchmark
In December, Finance Minister Nirmala Sitharaman told Parliament that tobacco and tobacco products in India are not taxed at the benchmark level recommended by the World Health Organization.
She explained that the WHO uses an affordability index for tobacco products, monitoring price ranges and flagging cases where taxation is below the benchmark. She also stated that lower taxation does not effectively discourage tobacco consumption.
According to her statement, India’s total tax incidence on tobacco stands at 53% of the retail price.
This level is significantly lower than the WHO’s recommended benchmark of 75% of the retail price.
The revised tobacco tax regime is expected to affect not only total government tax revenues but also how revenues are divided between the Centre and the states.
This impact is particularly linked to the introduction of a higher GST rate alongside excise duty and the new health and national security cess.
Rajat Mohan, senior partner at AMRG & Associates, said the change could lead to a “reboot” period for the industry.
During this phase, there may be temporary volatility in prices and profit margins as companies reassess costs, demand sensitivity, and overall profitability.
He noted that it is reasonable to expect that the industry will take some time to stabilize at a sustainable pricing and margin structure.
Mohan also pointed out that, in the absence of the National Anti-Profiteering Authority, there is an expectation that producers will behave responsibly.
Specifically, producers are expected not to use the tax transition as a reason to artificially raise prices beyond what is justified by the new tax regime.
For pan masala manufacturers, the health and national security cess will be imposed based on production capacity rather than actual output.
Under this capacity-based taxation system, the cess is calculated using the installed capacity of machines, not the quantity of goods dispatched from the factory.
Finally, the GST compensation cess will be fully discontinued once the Centre repays the ₹2.69 trillion debt raised to support states during the pandemic.
