Govt Moves to Maintain High Taxes on Tobacco & Pan Masala: New Excise Duty and Health Cess From 2026

Finance Minister Nirmala Sitharaman has introduced two significant bills in the Lok Sabha to ensure that taxes on tobacco, cigarettes, gutkha, bidi and pan masala remain unchanged even after the GST 2.0 regime fully stabilises. The move aims to prevent any drop in the total tax incidence once the current compensation cess expires in 2026.

The bills—tabled during the ongoing Winter Session—include:

1. The Central Excise (Amendment) Bill, 2025

This bill reintroduces and sharply increases the central excise duty on tobacco and related products.

2. The Health Security & National Security Cess Bill, 2025

Introduces a new Health Cess on pan masala, gutkha, and similar “sin goods”.

Why the New Taxes Are Needed

GST 2.0, launched on September 22, 2025, capped the GST rate on sin goods at 40%.
However, tobacco and pan masala were kept out of this reset because states are still repaying massive Covid-era compensation loans.

Once these loans—borrowed in FY21 and FY22—are fully cleared (expected by March 31, 2026), the compensation cess on tobacco will automatically lapse.

To prevent tobacco and pan masala companies from enjoying any reduction in taxes, the Centre is now shifting the burden from:

❌ Compensation Cess
to
✅ Central Excise Duty + New Health Cess

This ensures prices of cigarettes, pan masala, and gutkha do not fall.

Government’s Official Clarification

According to the official note,

“Compensation cess levied on tobacco and tobacco products will be discontinued once interest and loan liabilities are fully discharged.”

The amendment is necessary to give the government fiscal space to maintain the current high tax burden on these products.

What This Means for Consumers & States

For Consumers:

• Prices will remain high even after the compensation cess ends.
• Cigarettes, bidis, gutkha, pan masala, chewing tobacco will not become cheaper.

For States:

• Revenue will now come through the GST devolution pool instead of the compensation cess fund.
• No financial loss for state governments.

For Public Health Advocates:

• They have welcomed the move, calling it a “smart health revenue strategy.”

For the Industry:

• Manufacturers say it confirms the government’s stance that taxes on sin goods will never be reduced.

What’s Next?

Both bills are expected to be discussed and passed in the current Winter Session as the government aims to complete the transition before April 2026.