'No Additional Tax On Tobacco': FM Sitharaman Clarifies On Central Excise Amendment Bill

Finance Minister Nirmala responded to a discussion on the Central Excise (Amendment) Bill in the Lok Sabha on Wednesday, Dec. 3 and clarified that the bill does not put forth any additional tax on tobacco. During the Parliament's winter session today, FM Sitharaman said that the excise duty mop-up from tobacco will be a part of a divisible pool.

FM Sitharaman clarified that 41% of tax revenues collected from excise duty on tobacco and related products will be shared with the states.

The Central Excise (Amendment) Bill, 2025, seeks to replace the existing GST compensation cess on cigarettes, chewing tobacco, cigars, hookah, zarda and scented tobacco with a revised excise structure. FM Sitharaman also clarified in her response that the bill is not a new law or an additional tax. "It is not something that the Centre is taking away," she said.

'This is not an additional tax. This is not a cess. This is excise duty. It existed before GST... It is coming back to the Centre, to be collected as excise duty, which will go to the divisible pool. It is going to be redistributed again at the 41 per cent which has to go to the states,' FM Sitharaman said.

Central Excise Amendment Bill changes for tobacco tax

“Even in India, prior to GST, tobacco rates were increased annually. This was primarily due to health-related concerns, as higher prices or taxes were intended to act as a deterrent so that people would not get into the habit," said FM Sitharaman.

Currently, tobacco products attract 28% GST plus a variable cess. Under the proposed bill, unmanufactured tobacco would face an excise duty of 60-70%, cigars and cheroots would be taxed at 25% or Rs 5,000 per 1,000 sticks, whichever is higher.

Cigarettes up to 65 mm without filters would attract Rs 2,700 per 1,000 sticks and Rs 4,500 per 1,000 sticks for lengths up to 70 mm. The levy of excise on tobacco will ensure that incidence of tax on the demerit good remains same even after the expiry of the GST compensation cess, according to FM Sitharaman.

Moving the excise bill for discussion and passage in the Lok Sabha, FM Sitharaman said since the GST law caps maximum rate of tax at 40%, the ultimate tax incidence on tobacco after removal of GST cess would come down from the current level if excise duty is not levied.

'In order to ensure that the incidence is not lower than what it was during GST with the compensation cess, we are bringing this excise. In a way we are saying cigarettes should not become affordable now because incidence has become lesser,' the minister said.

The bill seeks to replace GST compensation cess which is currently levied on all tobacco products such as cigarette, chewing tobacco, cigar, hookah, zarda, and scented tobacco. FM Sitharaman said the bill was necessary as the loan taken to meet the revenue loss of states during Covid will be repaid in a 'couple of weeks', after which compensation cess will cease to exist.

Elaborating on the Central Excise Amendment bill, FM Sitharaman said in the Lok Sabha that the compensation cess which was collected till 2022 went in the hands of the states, it was given off to the states and by law at that time when GST was introduced compensation cess was to be collected for five full years and it came to an end in 2022.

Quoting the World Health Organisation (WHO) observation that cigarette affordability has either stagnated or increased in the past decade in India, FM Sitharaman said that cess rates on cigarettes have remained unchanged since 2017, when GST was implemented.

At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.

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