Tobacco Products May Face Additional Levy As Government Weighs Post-Cess Tax Options | Profit Exclusive

The government is actively considering the imposition of an additional levy on tobacco and related products, including cigarettes, cigars, chewing tobacco and gutka. The move comes as part of ongoing deliberations to fine-tune taxation mechanisms on sin goods while keeping the overall tax incidence unchanged.

According to official sources, two options are being examined. The first involves tweaking the central excise duty, a structure similar to that used in the pre-GST era for different forms of tobacco consumption. The second option is the introduction of a new health levy, which would require an amendment to the GST Act through parliamentary approval.

At present, the combined tax incidence, including GST and compensation cess on sin goods like tobacco, varies widely, ranging from 60–80% for some products to 160–200% for items like gutkha. Additionally, under the Central Excise laws, excise duty and the National Calamity Contingent Duty (NCCD) are also levied on these goods.

The proposed additional levy is expected to be rolled out in the fourth quarter (Q4) of the current fiscal, sources indicated. The government has maintained that the total tax incidence on tobacco items will remain unchanged, suggesting a restructuring of how the tax is collected rather than an increase in burden.

Importantly, the additional levy will apply only to tobacco products. Other goods falling under the new special 40% GST rate, such as luxury cars, high-end motorcycles, and carbonated beverages, will be excluded from any additional levy at this time.

While the new GST rates are set to take effect on Sept. 22, tobacco-related changes will be deferred until the conclusion of the compensation cess regime, which is expected to end by December 2025. 

Finance Minister Nirmala Sitharaman stated last Wednesday that tobacco products and related items will continue to attract the current GST rate along with the compensation cess until the central government repays the loans it took during the pandemic to offset state revenue losses.

She clarified that items such as pan masala, cigarettes, gutkha, zarda, unmanufactured tobacco, and beedis will remain under the existing tax and cess structure until all associated loan and interest obligations are cleared. After repayment, the cess will be removed, and these products will instead be taxed at a uniform 40% GST rate.

While Sitharaman did not specify a precise timeline for the loan repayment, she mentioned it would be completed “well within this calendar year.” The GST Council has authorised her to immediately end cess collections once the loans are fully repaid.

To compensate for the shortfall in cess collections during the pandemic, the Centre had borrowed Rs 1.1 lakh crore in 2020–21 and Rs 1.59 lakh crore in 2021–22. As per the 2025–26 Union Budget, the government aims to collect Rs 1.67 lakh crore through compensation cess this fiscal, with Rs 67,500 crore allocated for loan repayments. In previous years, repayments included Rs 78,104 crore in 2023–24 and Rs 1.24 lakh crore in 2024–25.