On February 1, 2026, the government implemented a major change in the taxation of cigarettes, tobacco products, and pan masala. Under the new system, an additional excise duty and a health and national security cess now apply on these products, on top of the existing GST. This move aims to tighten regulation and discourage consumption of harmful products, while also boosting public health and revenue collection.
New Tax Structure for Tobacco and Pan Masala
Under the revised regime:
- The products will still attract GST at the highest applicable level (40%) — higher than the previous 28% rate — as per new guidelines.
- The compensation cess previously charged since the launch of GST in 2017 has now been replaced.
- An additional excise duty applies to cigarettes and tobacco products.
- A new Health and National Security Cess now applies specifically to pan masala manufacturers.
These changes mark a shift from the earlier tax model, where products were taxed at 28% GST plus a compensation cess.
How Cigarette Prices May Rise
Under the new rules, cigarette taxation is now more complex and depends on length and type:
- Short non-filter cigarettes (up to 65 mm) attract an additional excise of approximately ₹2.05 per stick.
- Short filter cigarettes of the same length have about ₹2.10 duty per stick.
- Medium-length cigarettes cost around ₹3.6–4 per stick, and longer variants about ₹5.4 per stick.
- Some non-standard or premium designs may attract the highest levies up to ₹8.50 per stick.
Industry observers believe this could push cigarette prices significantly higher, with possible future retail hikes compared to current levels.
New Valuation Rules and Compliance Steps
The government has also introduced an MRP-based valuation system for tobacco products like chewing tobacco, jarda, gutkha, and khaini. This means GST will be calculated based on the retail price printed on the packet, instead of the factory cost.
Pan masala manufacturers now face enhanced compliance requirements:
- Fresh registration under the new Health and National Security Cess law is mandatory.
- CCTV systems monitoring packing machines must be installed, with video footage stored for at least two years.
- Manufacturers must disclose the number and capacity of machinery to the excise authorities.
These steps aim to curb tax evasion and strengthen oversight.
What Consumers Should Know
- Effective date: February 1, 2026
- Higher excise: Applies to cigarettes and tobacco products
- New cess: Health and National Security Cess applies to pan masala
- MRP-based GST: GST will now be based on retail price, reducing undervaluation
- Compliance norms: More stringent regulations for pan masala units
Tax Burden and Government Goals
Even after the tax overhaul, the overall tax incidence (including GST) on pan masala is expected to remain around 88%, roughly similar to current levels.
The government says the new excise and cess structure not only keeps tax levels high on harmful “sin goods” but also creates a predictable revenue stream for health and national security initiatives, fulfilling broader policy goals.
As this new tax regime takes effect, smokers and users of tobacco and pan masala products will likely see higher prices at retail outlets, while the government expects improved tax compliance and public health outcomes.
