Tobacco Products: New Excise Duty Structure Implemented, Cigarette Prices Rise from February 1

The Central Government has implemented a new excise duty structure for cigarettes and tobacco products effective February 1, 2026. This regulatory shift has resulted in an immediate increase in the retail prices of smoking and smokeless tobacco products across the country. This move is categorized as the most significant tax hike on cigarettes in nearly seven years. The primary objective behind this decision is to align India's tobacco taxation framework with the World Health Organization (WHO) public health standards, which recommend a tax burden of at least 75% of the retail price.

Restructuring of the Taxation Framework

Under the new regime, the taxation structure for cigarettes and tobacco products has been completely overhauled, while previously, these products were subject to 28% GST plus a Compensation Cess. This has now been replaced by a structure comprising up to 40% GST, an additional excise duty per stick based on the length of the cigarette, and relevant health cesses. By removing the Compensation Cess and introducing specific excise duties, the government aims to streamline revenue collection while addressing health concerns associated with tobacco consumption.

Price Escalation Based on Cigarette Length

The increase in cigarette prices has been categorized based on the length and type of the product. 05 per stick. 10 per stick. 60 to ₹4 per stick. 50 per stick.

New Regulations for Pan Masala and Gutkha

For products such as Pan Masala, Khaini, and Gutkha, an MRP-based valuation system has been introduced, while gST will now be calculated based on the retail sale price printed on the packet rather than the manufacturing cost. On top of that, a 'Health and National Security Cess' (HNSC) will be levied based on the production capacity of the manufacturing units. Following these changes, the total tax burden on Gutkha is expected to reach 91%, while Pan Masala and chewing tobacco will face tax burdens of 88% and 82% respectively.

Strict Compliance and Manufacturing Oversight

The government has also mandated stringent compliance standards for tobacco manufacturers. Under the new rules, fresh registration for all manufacturers is mandatory. Manufacturing units are required to install CCTV cameras on all packing machines, and the footage must be preserved for a minimum of 24 months. Detailed information regarding the number of machines and their production capacity must be provided to excise officials. While manufacturers can claim duty exemptions if a machine remains non-operational for 15 days or more, such claims will be subject to rigorous verification processes.

Analytical Perspective and Market Impact

According to industry analysts, this tax hike is a dual-purpose move intended to bolster government revenue and discourage tobacco use. The alignment with WHO recommendations signifies a shift toward health-centric fiscal policy. A report by CRISIL Ratings suggests that this tax increase could lead to a 6% to 8% decline in the sales volume of the domestic cigarette industry in the upcoming financial year. However, experts also point out that excessive taxation often carries the risk of increasing the illicit trade of smuggled and non-duty-paid cigarettes. The government's current focus remains steadfast on public health safety and strengthening tax compliance within the sector.