India Implements New Tobacco Tax

India has implemented a new tax regime on cigarettes, tobacco products, and pan masala, effective February 1. This overhaul replaces the existing 28% Goods and Services Tax (GST) plus compensation cess with a 40% GST, supplemented by additional excise duties and a dedicated health and national security cess. The new structure includes an MRP-based valuation mechanism for certain tobacco products and length-based excise duties on cigarettes ranging from Rs 2.05 to Rs 8.50 per stick. Chewing tobacco and gutkha will attract excise duties of 82% and 91% respectively, while pan masala will maintain an 88% overall tax incidence with the new cess levied on manufacturing capacity. Pan masala manufacturers are also required to register under the new law, install CCTV systems, and disclose machine capacities. The proceeds from these levies will be shared with states for health awareness and other health-related programs, and 41% of the Centre's tax revenues from tobacco will be redistributed among states. Finance Minister Nirmala Sitharaman stated the purpose is to create a predictable resource stream for health and national security. This move aligns India's tobacco taxation more closely with global best practices and World Health Organization recommendations, which emphasize annual duty increases to reduce tobacco consumption. S&P Global — CRISIL Ratings projects a 6-8% volume contraction in the domestic cigarette industry due to these changes. The India — GST Council had approved this mechanism in September 2025, following the end of the compensation cess framework.