40% GST on Cigarettes and Sin Goods

● The Union Government has approved a 40% GST on Cigarettes, pan masala and similar tobacco products under the “sin tax” policy.

● The new tax rate will come into effect from February 1, 2026 replacing the earlier 28% GST plus compensation cess structure.

Key Changes

● Earlier, cigarettes in India were taxed under a complex, multi-layered system that included basic excise duty, National Calamity Contingent Duty (NCCD), 28% GST and a compensation cess.

● Now, the GST rate on cigarettes has been increased to 40%, the compensation cess has been completely removed. To offset this, excise duties have been sharply raised, ranging from ₹2,050 to ₹8,500 per 1,000 sticks, depending on cigarette length and whether they are filtered or not. The NCCD remains unchanged.

● For paan masala without tobacco, the GST rate has been increased from 28% to 40% along with the introduction of a new Health Security se National Security (HSNS) cess, while keeping the overall tax burden unchanged at 88%.

● In the case of gutkha (paan masala with tobacco) the excise duty has been sharply raised to 91%. Similarly, chewing tobacco and jarda will now attract an excise duty of 82%.

Impacts

● Cigarette manufacturers estimate that the additional levies will increase their tax burden by 20% to 30%, while market analysts project a 15% to 40% rise in retail prices, particularly for filter and longer cigarettes.

● Stock Market shares of tobacco producing companies like ITC fell by around 10%, while Godfrey Phillips India declined by nearly 17%. This negative market response indicates fears of reduced consumer demand, pressure on profit margins and greater regulatory uncertainty.

Government’s Rationale

● Public Health Consideration: The government argues that cigarette affordability has stagnated or increased over the past decade due to rising incomes. India’s total tax incidence on cigarettes is about 53% of retail price which is below the WHO recommended 75%. This gap suggests scope for higher “sin taxes”. Higher prices are expected to discourage consumption especially among youth and new users.

● Fiscal Considerations: Over 80 countries revise tobacco taxes every year, making India’s move consistent with international practice. Even after the hike, India’s tobacco taxes remain moderate by global standards. The restructuring also helps maintain government revenue as the GST compensation cess expires after March 2026, ensuring fiscal stability without breaching global norms.

Industry Concerns

● The Tobacco Institute of India pointed out that legal cigarettes make up only about 10% of total tobacco consumption, yet they contribute nearly 80% of the total tobacco tax revenue. It also noted that a huge quantity of illicit or smuggled cigarettes enters the market causing revenue loss to the government. The government should make more stringent efforts to curb illicit or smuggled cigarettes to the Indian Market.

● According to the industry, further tax increases could encourage smuggling and illegal production, weakening regulatory control and potentially reducing government revenue.

Capacity based Taxation Mechanism

To curb tax evasion in the machine driven tobacco and paan masala sectors, the government has adopted a capacity based taxation mechanism. Under this system, duty is calculated based on the number of packing machines installed, their maximum rated speed and the retail sale price (RSP) rather than actual reported production. This approach improves predictability and limits under reporting of production.

“Sin Tax”

Sin tax refers to a special excise or higher indirect tax levied by governments on goods and services deemed harmful or morally undesirable such as tobacco, alcohol, gambling and sugary carbonated drinks. Our government wants to encourage use of fruit juices instead of carbonated bottled drinks to help farmers and improve health concerns of its citizens. The purpose is to discourage consumption by raising prices, reducing affordability and demand and to generate revenue for public health, welfare and anti addiction programs.

Note

● The final decision making body in the GST structure is the GST Council. Any change in GST on cigarettes and sin goods will need approval of the GST Council. Union Finance Minister is the ex-officio Head of GST Council and Finance Ministers of all states and representatives of UTs as members.

● On alcohol for human consumption, instead of GST excise duty is levied by State Governments. This Excise Duty differs in different states and this is the reason for different rates of same brand alcohol in different states. Similarly, Five Petroleum Products (Crude Oil, Petrol, Diesel, Natural Gas and Aviation Turbine Fuel) are kept out of the purview of GST. Instead of GST, VAT is levied by states on these products causing different prices of these products in different states.