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Informist, Friday, Sept. 5, 2025

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – The finance ministry may hike excise duty or the National Calamity Contingent Duty on tobacco products to maintain the tax incidence on these sin goods after the goods and services tax rate rejig takes effect and the GST compensation cess is discontinued later this year, a senior ministry official said. 

 

"The government will not allow tax incidence to go down for tobacco products, so a mechanism is being finalised to ensure that the overall tax burden remains the same," the official told Informist. "Preliminary discussions have happened within the ministry, maybe within the next two weeks, the plan will be finalised," the official added.

 

Currently, tobacco products like cigarettes already attract excise duty, calamity contingent duty, and compensation cess with varying rates depending on the length of the cigarette or filter present, flavouring, among other specifications. For instance, for every thousand sticks of cigarettes up to 65 millimetres in length, the excise duty amounts to INR 5, while the NCCD is INR 230, and the compensation cess is 5% plus INR 2,076. The combined taxation on tobacco products in India is currently in the range of 53%-88%.

 

According to the official, the Centre will likely give preference to hiking excise duty on tobacco products, considering it falls under the divisible pool of taxes. States may oppose moving tobacco to an entirely Centre-administered tax like NCCD, which is classified as a surcharge and is out of the divisible pool, the official added. States are already out of the picture to have a say on how the tax incidence will be ensured post discontinuation of the GST compensation cess levy, but having an assured 41% share in the additional levy may help abate their revenue shortfall woes. As per the 15th Finance Commission's recommendations, the Centre devolves 41% of its divisible pool of revenue to states.

 

The finance ministry official also said that the government may choose to hike both excise duty and NCCD on tobacco products to ensure tax incidence. "A combination of both may also be decided," the official said.

 

In a landmark meeting on Wednesday, the GST Council decided to overhaul the rate structure by tweaking the four-slab GST structure of 5%, 12%, 18%, and 28% to a two-slab structure of 5% and 18%. The Council also introduced a new GST rate of 40% that will be imposed on sin and luxury goods and will effectively subsume the GST compensation cess that many of the items on the 28% GST bracket attracted. All new rates, except for those on tobacco products, will take effect on September 22. 

 

While the treatment of all other luxury goods will be uniform and fairly simple with GST changes taking effect from Sept. 22, tobacco products will have a different tax structure. Finance Minister Nirmala Sitharaman said on Wednesday that the GST council decided to continue with the compensation cess levy on only tobacco products beyond Sept. 22 till the time the loans taken to compensate states are repaid. "I cannot speculate on the time now, whether it is October or November, but it'll be well within, I think, this calendar year," Sitharaman said. 

 

The GST compensation cess was introduced to bring states on board to adopt the GST regime in 2017. The Centre had promised to protect 14% revenue growth for states for the first five years by levying a compensation cess on certain luxury goods, including motor vehicles, expensive motorcycles, caffeinated beverages, and sin goods such as tobacco items and pan masala. Initially set to expire in June 2022, the cess was extended until March 2026 to repay INR 2.69 trillion in loans taken by the Centre to partly bridge the revenue shortfall of states during the COVID-19 pandemic.  End

 

Edited by Saji George Titus

 

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