The Goods and Services Tax (GST) Council has decided against an immediate hike in GST rates on tobacco products. However, to sustain revenue, the Centre is considering imposing an additional levy on these items once the GST compensation cess period ends in March 2026.

Currently, tobacco products attract the highest GST slab of 28%, along with a compensation cess that varies depending on the product. This makes tobacco one of the most heavily taxed categories under the GST regime. The compensation cess was introduced to compensate states for revenue losses arising from the implementation of GST.

With the end of the compensation cess period approaching, the central government is exploring alternative mechanisms to maintain a steady revenue stream for both the Centre and the states. A proposal is under consideration to introduce a new levy or surcharge specifically for tobacco products. This would ensure that the effective tax incidence on tobacco remains high, with no price relief expected for consumers.

Consumers should not expect tobacco to become cheaper once the cess ends. Cigarettes, bidis, and chewing tobacco are likely to remain expensive, with the effective tax incidence staying around 60%–70%, depending on the product. In some instances, the new levy could even lead to a slight increase in prices.

The GST Council, in a meeting held on September 3, 2025, approved a new 40% tax slab for sin and luxury goods, effective from September 22, 2025. This includes pan masala, gutka, cigarettes, and other tobacco products such as chewing tobacco, zarda, and beedi. However, the implementation of the 40% GST rate on tobacco products will be delayed until the existing loan and interest payment obligations under the compensation cess account are fully discharged. Until then, these products will continue to be taxed under the current system of 28% GST plus compensation cess. Nirmala Sitharaman, the Finance Minister, indicated that these obligations should be met by the end of the calendar year.

The decision to maintain high taxes on tobacco aligns with public health objectives. A Group of Ministers (GoM) proposed increasing the highest GST tier on tobacco and sugar-sweetened beverages from 28% to 35%. This proposal recognizes that there have been no significant increases in GST rates on harmful products like tobacco since the introduction of GST, except for minor hikes in the National Calamity Contingent Duty (NCCD). This has made these products more affordable, undermining efforts to curb their consumption.

India is the second-largest consumer of tobacco globally, with a significant percentage of adults and students using tobacco in some form. Tobacco use is a leading risk factor for non-communicable diseases and causes over 3,500 deaths daily in India. The economic burden of tobacco use and second-hand smoke is substantial, exceeding the annual tobacco tax revenue.

While the proposed GST hike to 35% is expected to reduce tobacco consumption and boost tax revenues, the approved 40% slab is projected to further increase prices by 5-6%. The tax and price increase will be magnified due to the change in tax computation method on tobacco products as GST will now be levied on the retail sale price printed on the pack instead of the transaction value or actual price paid.

The government aims to discourage consumption of harmful goods and generate revenue for public welfare through these sin taxes. Taxes on sin goods are highly price-inelastic, meaning that demand remains relatively stable even with price increases, ensuring higher revenue for the government.