Central Excise (Amendment) Act, 2025
Economy: Tax Reforms; GST; Tobacco products;
Context: Finance Ministry announces end of GST compensation cess; beed is in 18% slab, other tobacco products in 40% bracket as govt. bids to ‘ensure that real cigarette prices rise faster than incomes’.
- The Union Finance Ministry issued a series of notifications that will give effect to the new taxation regime for tobacco products from February 1 2026.
- The Central Excise (Amendment) Act, 2025, passed recently, specifies new rates of excise duty on tobacco products.
Excise duty on cigarette
- The Ministry also notified that provisions of the Health Security se National Security Act, 2025, which intends to levy a cess on pan masala units, will come into force from February 1.
- Under the Goods and Services Tax (GST) regime, the excise duty on cigarettes had so far been rendered a nominal amount of a “fraction of a paisa” per cigarette stick, and the GST compensation cess rate on tobacco products had not been increased since it was implemented in July 2017.
- “For India, affordability has either stagnated or increased in the past decade, meaning cigarettes have not become more expensive relative to consumers’ purchasing power,” the note said. “This is contrary to global public health guidance, which emphasises annual increases in specific excise duties to ensure that real cigarette prices rise faster than incomes.”
- At the same time, the Ministry notified February 1 as the date from which the GST compensation cess would cease to exist. The cess was originally introduced for a period of five years to compensate States for any loss arising out of the implementation of GST.
Tax slabs
- The Finance Ministry also notified the new GST rates for tobacco products. Beedis have been moved to the 18% category from the now-defunct 28% slab. All other tobacco products have been moved to the 40% slab. These new rates will be effective from February 1.
- The GST compensation cess was to end in 2022. However, due to the COVID-19 pandemic, the cess collections were not enough to compensate the States and so the Centre borrowed money to compensate them.Hence, it was extended until 2026, with the proceeds being used to repay the loan.
- With the impending end of the loan, the Centre on September 22, 2025, removed the incidence of the cess on most items except tobacco items. From February 1, 2026, the cess will no longer apply on these items either, effectively ending it.
- Finally, the Ministry introduced a new valuation mechanism for tobacco products such as chewing tobacco, filter khaini, jarda, scented tobacco, and gutkha, whereby the GST value would be determined based on the retail sale price declared on the package.
- Regarding the Health Security se National Security Act, 2025, the Ministry justified the inclusion of the national security aspect by saying that conventional tax revenues cannot always guarantee funding for national security functions, and so a dedicated cess is needed for the purpose.
- “General tax revenues are subject to competing developmental priorities and cannot always guarantee sustained long-term funding for core national security functions,” the FAQ note said.
- “A dedicated purpose-specific cess enables the Union to create a non-lapsable, predictable financial stream that supports multi-year security preparedness, technological upgradation, capacity creation, and advanced equipment procurement — without increasing the tax burden on the general population or raising broad-based rates such as GST.”
Brief on Central Excise (Amendment) Act, 2025:
What is it?
The Central Excise (Amendment) Act, 2025 is a law passed by Parliament in December 2025 to amend the Central Excise Act, 1944 by revising excise duty rates on tobacco and tobacco-related products.
The amendment was introduced to ensure that tax incidence on tobacco products remains protected even after the cessation of GST compensation cess.
Key Features of the Amendment
Higher Excise Duties on Tobacco Products
The Act increases central excise duty on various tobacco products:
- Cigarettes, cigars, hookah, chewing tobacco, zarda and scented tobacco products are covered under the revised structure.
- Excise duty on cigarettes is raised from the earlier ₹200–₹735 per 1,000 sticks to ₹2,700–₹11,000 per 1,000 sticks (depending on category).
- Chewing tobacco duty increased from 25% → 100%.
- Hookah tobacco duty increased from 25% → 40%.
- Smoking mixtures (for pipes/cigarettes) duty increased from 60% → 325%.
The objective is to protect total tax incidence after GST compensation cess ends, and also to discourage tobacco consumption for public health reasons.
