Higher excise duty on tobacco, new cess on pan masala to take effect from February 1

India will begin levying higher taxes on tobacco products and pan masala from February 1, 2026, after the Union government formally notified a new excise duty and cess regime to replace the existing GST compensation cess, news agency PTI reported. 

The move marks a significant overhaul of the taxation framework for so-called sin products.

According to the notification issued late Wednesday, the new levies will be imposed in addition to the applicable Goods and Services Tax rates. From February 1, pan masala, cigarettes, tobacco and similar products will attract a GST rate of 40 per cent, while biris will continue to be taxed at 18 per cent under the GST framework.

Over and above GST, a Health and National Security Cess will be levied on pan masala, while tobacco and tobacco-related products will attract an additional excise duty, as notified by the Finance Ministry. These new charges will replace the GST compensation cess, which is currently imposed at varying rates on tobacco and pan masala.

The Finance Ministry also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026. 

The rules lay down the mechanism for determining production capacity and collecting duty from manufacturers of chewing tobacco, scented tobacco and gutkha, indicating tighter regulatory oversight of the sector.

The government’s decision follows parliamentary approval in December of two Bills that enable the levy of the Health and National Security Cess on pan masala manufacturing and an additional excise duty on tobacco products. With Parliament having cleared the legislation, the Centre was required to formally notify the date of implementation, which has now been fixed as February 1, 2026.

As part of the transition, the existing GST compensation cess on tobacco and pan masala will cease to apply from the same date. The compensation cess was originally introduced to make up for revenue losses suffered by states following the rollout of GST.

By replacing the compensation cess with a combination of cess and excise duty, the Centre has restructured the taxation regime while maintaining a high tax burden on products it classifies as harmful to public health. The new measures are expected to have implications for manufacturers, product pricing and consumption patterns once they come into force early next year.