Rijo M. John, PhD

The tobacco taxation regime in India remained largely unchanged following the introduction of the Goods and Services Tax (GST) in 2017. This situation evolved following deliberations at the 56th meeting of the GST Council in September 2025 and the enactment of subsequent legislation. Together these initiated a comprehensive restructuring of the taxation framework. The reforms primarily encompassed revisions to key GST rates (commonly referred to as the GST 2.0 reform), amendments to the Central Excise structure through the Central Excise (Amendment) Bill, enacted on 3 December 2025 and notified on 31 December 2025, and the introduction of The Health Security se National Security Cess (tax) Bill on pan masala on 5 December 2025. Taken together, these measures constitute a substantive reconfiguration of tobacco taxation in India, reflecting efforts to strengthen tax administration while addressing fiscal considerations alongside public health objectives. 

The Core Components of the Reform 

The new framework, scheduled for full implementation starting February 1, 2026, introduces three fundamental shifts in how tobacco is taxed. Firstly, Rate Revisions –  GST on several tobacco products has been increased from the standard 28% to a peak rate of 40% while it reduced the GST for bidis from 28% to 18%. Secondly, Base Transformation – for cigarettes, pan masala, and smokeless tobacco (SLT), the tax base has shifted from transaction value to Retail Sale Price (RSP). Finally, Excise Re-emergence – to offset the impending expiry of the GST compensation cess, which currently accounts for over 60% of taxes on cigarettes, the government has revised central excise duty rates to preserve and, in some cases, enhance the tax burden. 

Fiscal Sovereignty and Health Prioritization 

Several elements of this reform warrant positive assessment from a public finance and public health perspective. Most notably, the reforms entail a substantial increase in the overall tax burden on cigarettes, with the total tax share estimated to rise from approximately 55% to 66%. This adjustment brings India closer to internationally recommended benchmarks that emphasize price-based measures as an effective instrument for reducing tobacco consumption. 

In addition, the restructuring re-establishes central excise duties as the dominant component of the total tax incidence on cigarettes and smokeless tobacco products. This represents an important institutional shift, as excise duty revisions fall solely within the purview of the Union government and are determined through the annual budgetary process. As a result, this approach reduces reliance on the consensus-driven decision-making mechanisms of the GST Council and permits more timely and flexible adjustments to tobacco tax rates. 

The introduction of The Health Security se National Security Cess Bill, 2025 constitutes a further notable development. By earmarking revenues for health-related purposes, the measure institutionalizes a fiscal mechanism through which tax revenues are directly linked to financing the mitigation of tobacco-related public health externalities. 

Challenges remain 

Notwithstanding these merits, the recent tax reform also has several features that may dilute its alignment with national public health objectives: 

First, although it substantially increases cigarette taxes, the resulting overall tax burden is still expected to remain below the internationally recommended benchmark of 75% of the retail price. The effective tax burden on bidis and SLT products is even lower. While future tax revisions could potentially address this shortfall, the current structure remains misaligned with global best practices. 

Second, the treatment of bidis constitutes a particularly significant concern. The reduction of the GST rate on bidis from 28% to 18%, combined with the introduction of a 10% excise duty, results in an approximately neutral overall tax burden of around 22%. This level is markedly lower than the estimated 66% tax burden on cigarettes. Given that bidis are the second most widely consumed tobacco product in India used by an estimated 72 million adults and are strongly associated with oral and lung cancers, this differential raises important equity and public health considerations. 

Third, the reintroduction of excise duties on bidis exclusively on an ad valorem basis represents a structural limitation from a tobacco control perspective. Inflation-adjusted specific taxes are generally preferred, as they compress price differentials between premium and low-cost products and reduce opportunities for consumer down-trading. Under the revised regime, virtually the entire tax burden on bidis, aside from a negligible National Calamity Contingent Duty, remains ad valorem, which may further enhance affordability among price-sensitive and lower socio-economic groups. 

Finally, the shift towards RSP-based taxation for cigarettes and SLT is intended to strengthen tax compliance and reduce under-declaration. However, its effectiveness will depend critically on the administrative capacity of tax authorities to monitor and verify brand-specific declared RSPs across manufacturers. Given the large number of cigarette and SLT brands in the Indian market, this approach may pose non-trivial implementation and enforcement challenges. 

Conclusion 

Overall, while the tax reforms introduced in 2025–26 are notable in scope, its approach remains somewhat inconsistent in its treatment of different tobacco products. India is a Party to the WHO Framework Convention on Tobacco Control (FCTC), which calls for uniformly high taxation across all tobacco products as a core demand-reduction strategy. The continued taxation of bidis at a level that is substantially lower—approximately one-third of the effective tax burden on cigarettes—limits the extent to which the policy protects populations that are disproportionately exposed to tobacco-related morbidity and mortality. 

Several policy directions could strengthen the public health impact of the current framework. These include a gradual transition from ad valorem to specific excise duties on bidis, the removal of preferential GST treatment for bidis to align their taxation with the 40% peak GST rate applied to other tobacco products, and the extension of the Health Security Cess to encompass all tobacco categories beyond pan masala. Such measures would allow the existing reforms to be more leveraged in support of health objectives and will be commensurate with India’s noncommunicable disease burden.  

Author 

Rijo M. John, PhD, Adjunct Professor, Rajagiri College of Social Sciences