The government of India has formally notified February 1, 2026, as the date on which the Goods and Services Tax (GST) compensation cess on tobacco and related products will end and a new tax regime will begin.
Under the new framework, the GST compensation cess, a levy originally introduced to compensate states for revenue shortfalls following the rollout of GST, will be discontinued/ in its place, the Centre will impose additional excise duty on tobacco products and Health and National Security Cess on pan masala and similar products. These levies will be charged in addition to the existing GST rates.
From February 1, cigarettes, tobacco, and pan masala are expected to attract a 40 per cent GST, while bidis will continue to attract 18 per cent GST. In addition, tobacco products will be subject to higher excise duties under the Central Excise (Amendment) Act, 2025, and pan masala will be subject to a new health and security cess.
The 56th GST Council decided to phase out the compensation cess until the remaining liability on back-to-back loans taken to cover state revenue losses during the pandemic is fully cleared.
However, the GST compensation cess was extended beyond June 30, 2022, to March 31, 2026, solely to repay state-level debt raised to address revenue shortfalls caused by the COVID-19 pandemic.
Although states have not been entitled to compensation since July 1, 2022, it was earlier decided that the cess would remain in force until March 31, 2026, to repay the back-to-back loans extended to states after cess collections declined in 2020 and 2021 amid the pandemic-induced economic slowdown.
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The 56th GST Council, however, limited the compensation cess to tobacco and related items only. Let’s wait until February 1 to know the exact price hikes for cigarettes, pan masala, cigars, cheroots, hookah, and chewing tobacco.
