Parliament on Thursday (December 4, 2025) approved a Bill to levy a higher excise duty on tobacco and related products once the GST compensation cess ends, with the Rajya Sabha returning the legislation to the Lok Sabha.
The Lok Sabha passed the Central Excise (Amendment) Bill, 2025 on Wednesday (December 3).
Replying to a discussion on the Bill in the Rajya Sabha, Finance Minister Nirmala Sitharaman said this was not an additional tax, and the tax burden, as currently applicable under the GST regime, would continue.
She said that in the last GST Council, it was discussed in detail, and as was agreed earlier, that the compensation cess collection would probably come to a stop at the end of December.
“Let me assure here itself straight away that the tobacco products will still be taxed under the demerit category at 40% in the GST frame of things. They will still be taxed at 40%, but there will not be any compensation,” Ms. Sitharaman said.
The provisions of the Bill will come into effect once the GST compensation cess, which is currently levied on tobacco, comes to an end.
The cess will cease to exist after the ₹2.69 lakh crore loan taken to compensate States for revenue loss during the COVID is repaid, which is likely to happen in the next couple of weeks.
Ms. Sitharaman said the items could not be taxed beyond 40% under the new GST changes, even if they were demerit goods.
“The incidence of tax on tobacco and tobacco-related products has therefore come down. You have no compensation. The highest rate that you have in GST is 40%, and as a result, it gives the impression that the government has allowed a lesser tax on tobacco, and therefore, it’s going to become affordable. The intent is not that,” she said.
The Finance Minister said that within the GST scheme of things, it continued to be at the highest rate, but now that the compensation cess could not be collected.
“We have to come back to the excise. The Central excise Act will now be back again,” she said.
Ms. Sitharaman also told the House that farmers were being encouraged to give up tobacco and grow other cash crops.
“This is being done in Andhra Pradesh, Bihar, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal. In these States, more than 1 lakh acres of land are shifting from tobacco cultivation to other crops,” she said.
She also assured that tobacco products would still be taxed under the demerit category at 40% in the GST regime.
WHO benchmark
“When GST was introduced, tax on tobacco and tobacco-related products — even with the cess — could not reach the benchmark set by WHO every year. As a result, the affordability index of tobacco products remains high, undermining public health goals.”
Later, the Bill was returned to the Lok Sabha by a voice vote.
The Bill, once enacted, will give the government the fiscal space to increase the rate of Central excise duty on tobacco and related products after the GST compensation cess, which is currently levied on all tobacco products such as cigarettes, chewing tobacco, cigars, hookah, zarda, and scented tobacco, ceases to exist.
Currently, a 28% Goods and Services Tax (GST) plus cess at a varied rate is levied on tobacco and related products.
The Bill proposes to levy an excise duty of 60-70% on unmanufactured tobacco. Excise on cigars and cheroots is proposed at 25% or ₹5,000 per 1,000 sticks, whichever is higher.
Cigarettes, depending on length and filter, are proposed to be taxed in the range of ₹2,700-11,000 per 1,000 sticks, while chewing tobacco is taxed at ₹100 per kg.
Published – December 05, 2025 12:58 am IST
