Why the Law Abandoned Production Figures
Indirect taxation, by its very design, prefers measurable realities. Under the classical excise framework, liability arose from manufacture and clearance, supported by daily production records, stock registers and invoices. However, certain industries consistently challenged this framework. The chewing tobacco, jarda-scented tobacco, and gutkha sector is a prime example. High-speed packing machines, round-the-clock production, minuscule pouch sizes, and historically fragmented compliance made real-time production measurement both difficult and contentious.
Years of enforcement experience demonstrated that disputes in this sector rarely centred on the law; they centred on facts, whether production was understated, whether machines were running at full speed, and whether registers reflected reality. The legislature responded not by further tightening record-keeping obligations, but by revising the very language of taxation. These 2026 Rules represent this shift. Instead of taxing what was actually produced, the law now taxes what could have been produced.
This is a conscious and pragmatic choice. Capacity is not a perfect proxy, but it is a stable one. It can be verified, sealed, certified and monitored. In choosing capacity over production, the law sacrifices micro-precision in favour of macro-certainty.
" जहाँ हर दाना गिनना असंभव हो , वहाँ बोरी की क्षमता ही आधार बनती है। " (When counting every grain becomes impossible, the sack's capacity becomes the basis.)
Short title and commencement - Rule 1
Rule 1(1) provides that these rules may be called Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026. Rule 1(2) provides that these rules shall come into force on 01.02.2026. Incidentally, these rules have been notified vide Notification No. 05/2025- Central Excise (N.T.) dated 31.12.2025, read with Corrigendum dated 22.01.2026.
Definitions that Close the Exit Doors - The Real Role of Rule 2
At first glance, Rule 2 appears to be a conventional definition clause. In substance, it is an anti-avoidance framework. Some of the important definitions are discussed below:
(I) Definition of Notified Goods - Rule 2(g)
" Notified goods" means chewing tobacco, jarda scented tobacco and gutkha notified under sub-section (1) of section 3A of the Act
The use of the expression "means" renders this definition exhaustive and restrictive , limiting its scope strictly to these three specified categories of tobacco products as formally notified by the Government. Unlike the expression "includes" , which would permit an expansive interpretation embracing additional items, "means" precludes any broader construction or inclusion of other tobacco variants (such as flavoured or scented preparations unless separately notified under Section 3A (1). This precise legislative drafting ensures that capacity-based excise duty collection and compliance obligations under the Rules apply exclusively to the enumerated goods, eliminating ambiguity and enabling targeted enforcement of high-risk tobacco products.
(II) Definition of Packing Machine - Rule 2(h)
"Packing machine" includes all types of Form, Fill and Seal (FFS) Machines and Horizontal Pouch Making Machines, by whatever name called , whether vertical or horizontal, single track or multi-track and any other type of packing machine used for packing of pouches of notified goods
The above definition has been deliberately kept as functional. Any machine capable of forming, filling, sealing, or packing pouches is covered, regardless of its name, design, level of automation, number of tracks, or vintage. This ensures that technological variation cannot be used as a shield against taxation.
(III) Definition of Retail Sale Price (RSP) - Rule 2(i)
"Retail sale price" means the maximum price at which the specified goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like and the price is the sole consideration for the sale:
Provided that where on the package, more than one retail sale price is declared , the maximum of such retail sale prices shall be deemed to be the retail sale price:
Provided further that if the notified goods are cleared in wholesale packages containing a number of standard packages with retail sale price declared on them, then, such declared retail sale price shall be taken into consideration for determining the rate of duty;
A careful reading of the above definition reveals that Retail Sale Price (RSP) ceases to be merely a marketing declaration. It becomes a tax parameter. Where multiple prices are printed on a pouch, the highest price is deemed to be the RSP for excise purposes. This deeming fiction reflects legislative disbelief towards pricing strategies that could otherwise be used to dilute duty.
By defining both machines and RSP expansively, Rule 2 ensures that the regime cannot be weakened through form, design or labelling.
(IV) Definition of identical goods - Rule 2(e)
"Identical goods" means goods which are same in all respects, including physical characteristics and quality as the goods being valued except for minor differences in appearance that do not affect the value of the goods;
This comprehensive formulation (employing "means") confines the scope to goods that are virtually indistinguishable from the goods subject to valuation, requiring exact correspondence across essential properties while permitting only superficial, value-neutral differences, such as packaging labels or minor colour variations.
(V) Definition of similar goods - Rule 2(j)
"Similar goods" means goods which although not alike in all respects, have like characteristics and like raw materials which enable them to perform the same functions and to be commercially interchangeable with the goods being valued having regard to the quality.
The foregoing definition of' similar goods" deliberately employs a substance-over-form approach. It clarifies that minor variations in brand, flavour, packaging, or quality are inconsequential, provided that the goods share fundamental characteristics, utilise substantially similar raw materials, possess identical end uses, and are market substitutes. Essentially, the criterion is based on functional and commercial equivalence rather than visual or cosmetic similarity, thereby ensuring that capacity-based duties cannot be circumvented through superficial product differentiation.
Applicability - Rule 3
Rule 3 serves as the primary entry point to the comprehensive framework. It stipulates that the Rules apply exclusively to chewing tobacco, Jarda scented tobacco, and gutkha, which are manufactured using packing machines and enclosed in pouches, as notified under section 3A(1) of the Central Excise Act, 1944. The Rule intentionally narrows its scope, excluding loose packing and manual processes. Consequently, the legislation targets a specific risk segment rather than the entire tobacco sector.
Factors relevant to production- Rule 4
Rule 4 clarifies that the production of notified goods is dictated by manufacturing capacity rather than declared output. The legislation emphasises the number of packing machines installed and their maximum capacity. It also takes into account the machines' ability to pack goods at various retail sale prices. Essentially, it is the machines, and not the books of account, that constitute the basis for duty assessment, thereby ensuring that the tax correlates with potential production rather than reported figures.
Quantity deemed to be produced- Rule 5
Rule 5(1) establishes a fixed, table-based approach to calculating the production of notified goods. It assumes that one packing machine operates to produce a set amount monthly, determined by the retail sale price (RSP) of each pouch and the machine's maximum monthly capacity. Therefore, actual production, sales, or stoppages do not influence this calculation.
Explanation to Rule 5(1) clarifies how multiple-track or multiple-line packing machines are to be counted: where additional shaping or anti-counterfeiting processes are involved, two such tracks or lines shall be deemed to be one individual packing machine for the purposes of calculation of the number of pouches per packing machine per month.
Illustration 1 [Based on Explanation to Rule 5(1)]
A manufacturer, Kirti Limited, uses a four-track pouch packing machine for gutkha.
Each track not only packs the pouch but also moulds the pouch into a distinctive shape and embosses a security pattern to prevent counterfeiting. Because the machine performs additional shaping and brand-distinguishing processes, two tracks are considered a single packing machine. Therefore, four tracks will be treated as only two packing machines for the purpose of calculating the monthly deemed production under Rule 5.
Further, the proviso to the above Explanation provides that, in the case of multiple-track or multiple-line packing machines that are incapable of performing such additional processes, one such track or line shall be deemed to be one individual packing machine for the purposes of calculating the number of pouches per packing machine per month.
Illustration 2: (Based on proviso to Explanation to Rule 5(1))
Another manufacturer, Harpreet Ltd., uses a four-track packing machine which only fills and seals plain pouches of chewing tobacco. No moulding, embossing, or anti-counterfeiting feature is involved. In this case, as per the proviso, each track is treated as a separate packing machine. Accordingly, four tracks will be counted as four packing machines for the purpose of determining the deemed monthly production and duty.
Rule 5(2) provides that the annual capacity of production shall be determined by multiplying the quantity of notified goods deemed to be produced in a month by twelve.
Illustration 3 [Based on Rule 5(2)]
A manufacturer operates one packing machine for chewing tobacco, which, as per Rule 5(1) read with the Table, is deemed to produce 2,24,64,000 pouches per month based on its speed and retail sale price. Thus, by applying Rule 5(2), the annual capacity of production shall be: 2,24,64,000 pouches × 12 = 26,95,68,000 pouches per year. Thus, irrespective of actual production or sales, the law treats this quantity as the annual production capacity for the purpose of duty determination.
Declaration to be filed by the manufacturer - Rule 6
Rule 6(1) requires every manufacturer of notified goods to file a declaration in Form CE DEC-01 via the portal. This must be done by 7 February 2026 or within seven days from the start of manufacturing, whichever is later . This ensures that the department is informed of manufacturing activity from the very beginning.
Illustration [Based on Rule 6(1)] - Initial Declaration
Shreyans Tobacco Pvt. Ltd. installs one gutkha packing machine and starts manufacturing on 03.02.2026. Since the Rules take effect on 1 February 2026 and manufacturing commences on 3 February 2026, the manufacturer must file Form CE DEC-01 on or before 10 February 2026 (i.e., within seven days of commencement). It must be borne in mind that the obligation to file the declaration arises from the act of commencing manufacture, not from the first clearance or sale.
Rule 6(2) provides that the declaration must include technical details of the packing machines, such as gear box ratios, number of funnels, number of tracks, and RPM of the main motor. These details must be certified by a Chartered Engineer in Form CE CCE-01 to ensure accuracy and prevent understatement of machine capacity
Illustration [Based on Rule 6(2)] - Technical Details and Certification
Shreyans Tobacco Pvt. Ltd. declares one pouch-packing machine configured with two tracks and two funnels. The machine operates at a gearbox ratio of 1:2 and at a main motor speed of 900 RPM.
In accordance with Rule 6(2), the manufacturer must disclose these technical particulars in Form CE DEC-01. Further, the declared specifications must be independently certified by a Chartered Engineer in Form CE CCE-01, confirming that the particulars truly and accurately represent the machine's actual production capacity.
This regulatory design reflects a conscious shift away from reliance on production figures. Instead, the department bases duty determination on objectively verifiable machine parameters and reinforces this approach through mandatory third-party technical certification to minimise the risk of manipulation.
Rule 6(3) provides that if there is any change in production-related factors (as referred to in Rule 4) or if a new machine is installed or commissioned, a fresh declaration must be filed within 15 days . However, no new declaration may be filed until the jurisdictional officer issues an order under Rule 7, thereby maintaining administrative control and continuity in capacity determination.
Illustration under Rule 6(3) - Change in Factors / New Machine
Situation 1 - Change in production factor:
The manufacturer replaces the gearbox, thereby increasing the machine's output speed. Rule 6(3) provides that since a production-related factor under Rule 4 has changed, a fresh declaration must be filed within 15 days of such change.
Situation 2 - Installation of an additional machine:
On 20 April 2026, the manufacturer installs a second packing machine. Rule 6(3) provides that a new declaration for the additional machine must be filed within 15 days . However, the manufacturer may not file another declaration thereafter unless the jurisdictional officer issues an order under Rule 7 determining the revised capacity. Thus, Rule 6(3) prevents the manufacturer from making frequent self-revisions and ensures that capacity determination remains under departmental supervision.
Verification of declaration - Rule 7
Rule 7 empowers the jurisdictional Deputy or Assistant Commissioner to verify the declaration filed by the manufacturer under Rule 6. This verification must be completed within ninety days. For this purpose, the officer may physically inspect the factory, check the technical specifications and maximum speed of the packing machines, and, if required, seek the opinion of an independent technical expert.
In simple terms, this rule ensures that the declared machine details accurately reflect the actual packing capacity, so that duty is determined based on the correct and verified production capacity.
Illustration [Based on Rule 7] - Verification of Declaration (Narrative Form)
Shreyans Tobacco Pvt. Ltd. files its declaration in Form CE DEC-01 under Rule 6, declaring the installation of one gutkha packing machine with two tracks, two funnels, and a main motor at a speed of 900 RPM, as certified by a Chartered Engineer. On receipt of the declaration, the jurisdictional Assistant Commissioner initiates the verification process as contemplated under Rule 7.
Within the prescribed ninety-day period, the officer conducts a physical inspection of the factory premises. During the visit, the officer examines the packing machine in operation, verifies the number of tracks and funnels actually installed, and cross-checks the gearbox ratio and motor RPM from the machine's technical plate and control panel. To ensure that the declared parameters are not merely theoretical but reflect the machine's true potential, the officer also observes trial runs to assess whether the declared maximum packing speed is technically achievable under normal operating conditions.
Where the machine configuration or speed claims involve technical complexity, the officer seeks the opinion of an independent technical expert to validate whether the declared specifications genuinely correspond to the machine's maximum packing capacity. After completing this verification exercise and being satisfied that the declaration accurately reflects the actual machine configuration, the officer proceeds to determine the production capacity under Rule 7, read with Rule 4. This verified capacity then becomes the lawful basis for the computation and collection of duty.
Determination of capacity - Rule 8
Rule 8(1) provides that if, after verification under Rule 7, no discrepancy is found in the declaration filed by the manufacturer, the jurisdictional officer must pass an order within fifteen days determining the annual production capacity of the packing machines. This brings certainty and finality to the declared capacity.
Rule 8(2) provides that if the jurisdictional officer finds discrepancies in the declaration that affect production capacity, he must inform the manufacturer and, after giving a reasonable opportunity to be heard, pass an order determining the correct capacity within 30 days from the date of verification under Rule 7. This ensures both accuracy and compliance with principles of natural justice.
Rule 8(3) provides that, where capacity is re-determined due to discrepancies, the manufacturer must pay duty based on the revised capacity for future periods. In addition , if any short-paid duty arises for the past period , the manufacturer must pay the differential duty along with interest, calculated from the date of machine installation or the date of change in production factors, as applicable, up to the actual date of payment.
Duty payable to be calculated - Rule 9
Rule 9(1) provides that the monthly duty is to be calculated by applying the rate of duty notified under Section 3A (3) of the Act to the determined capacity. For a new manufacturer, the duty for the first month is calculated on a pro rata basis based on the number of days the machine was installed and operational, and must be paid within 5 days of installation.
Illustration 1 [Based on Rule 9(1)]- Pro-rata Duty for a New Manufacturer
A new manufacturer, Aayra Ltd., installs one packing machine on 20 March 2026.
The monthly duty for one machine, as per the notified rate under Section 3A (3), is ₹30 lakh. Since the machine is installed only for 12 days (20th to 31st March) out of 31 days , the duty for March will be calculated on a pro-rata basis:
₹30 lakh × 12 ÷ 31 = ₹11.61 lakh (approx.) This amount must be paid within five days of installation.
Rule 9(2) provides that where packing machines are added, installed, removed, or uninstalled during a month, the law adopts a strict rule: the highest number of machines installed on any single day of that month will be considered for calculating duty for the entire month. This prevents short-term adjustments from reducing monthly duty liability.
Illustration 2: [Based on Rule 9(2)] -Maximum Number of Machines in a Month
A manufacturer, Anish Limited, has 3 packing machines at the start of April 2026.
On 10 April, one additional machine was installed, bringing the total to 4.
On 25 April, one machine was removed, reducing the total to 3.
For April 2026, duty will be calculated as if 4 machines were installed for the entire month, since 4 is the maximum number installed on any day.
In a nutshell, whereas new manufacturers get pro-rata relief only for the first month,
any increase during a month applies to the whole month.
Abatement - Rule 10
Rule 10(1) grants relief from duty when a packing machine remains completely non-operational for a continuous period of fifteen days or more. However, abatement is allowed only if the following three conditions are fulfilled:
The manufacturer must inform the department at least 3 working days in advance; the machine must be officially sealed by the department; and no production may take place during the sealed period.
Illustration 1:
If a packing machine is planned to remain shut from 1 April to 20 April, the manufacturer must inform the department by 27 March, have the machine sealed, and ensure that no production occurs during this period. Duty for these 20 days will be proportionately reduced.
Rule 10(2) provides that once eligible, the manufacturer must formally apply for abatement. The application must be filed on or before the 20th day of the month following the period of non-operation. This ensures timely verification and prevents delayed claims.
Illustration2:
For non-operation in April, the abatement application must be filed on or before 20th May.
Rule 10(3) deals with Order and Adjustment of Abatement. It provides that, after verification, the jurisdictional officer must issue an order within 15 days allowing abatement for each affected month. The allowed amount is adjusted against the duty payable for the immediately succeeding month. Importantly, the proviso to Rule 10(3) provides that no claim may be rejected without affording the manufacturer an opportunity to be heard, thereby safeguarding natural justice.
Illustration 3:
If abatement for April is allowed under an order dated 10 June, the reduced duty will be applied to the duty payable for June.
In essence, Rule 10 balances revenue protection with fairness—no duty to produce absent pre-declaration, verification, and proper documentation.
Quantification of abatement amount. - Rule 11
Rule 11 sets forth the procedure for calculating the exact amount of abatement once a machine qualifies for relief under Rule 10. The formula allocates the monthly duty evenly across all days of the month and grants relief for days on which the machine was completely inoperative.
Illustration
The monthly excise duty liability for one packing machine is ₹30,00,000, and the relevant month comprises 30 days. During this month, the packing machine remained duly sealed and completely non-operational for a continuous period of 15 days in accordance with Rule 10. In such a case, the abatement amount is calculated by proportionately allocating the monthly duty over the number of days in the month. Accordingly, the abatement works out to (₹30,00,000 × 15) ÷ 30, amounting to ₹15,00,000. Because the machine was unable to produce for half of the month, the manufacturer is entitled to a 50% abatement of the monthly duty, and the remaining duty is payable only for the period during which the machine was legally capable of operation.
De-sealing and resumption of operation- Rule 12
Rule 12 lays down the procedure for restarting a sealed packing machine. It requires the manufacturer to inform the jurisdictional Deputy or Assistant Commissioner at least 3 working days in advance of the proposed resumption date. The machine may be restarted only after it is formally de-sealed under the physical supervision of the jurisdictional Superintendent, thereby ensuring departmental control.
Illustration
A manufacturer's packing machine was sealed from 1 April due to non-operation.
He now intends to resume production from 21 April.
To comply with Rule 12, the manufacturer must inform the department by 16 April (allowing three working days). On 21 April, the Superintendent of Central Excise will physically deseal the machine, after which production may resume.
In simple terms, until official desecration is completed, the machine cannot be operated. This rule ensures that abatement ends only when the department authorises resumption, preventing unauthorised production during sealed periods.
Closing comments
Rules 1 to 12 collectively constitute the structural foundation of the Chewing Tobacco, Jarda & Gutkha Packing Machines Rules, 2026. These rules signify a notable departure from production-based taxation, replacing it with a system rooted in verifiable capacity, declared machinery, certified technical parameters, and regulated administrative oversight. By considering production, establishing duty based on machine potential, and permitting abatements solely through transparent sealing and verification, the legislation consciously prioritises systemic certainty over transactional precision. At this stage, the legal process remains focused on measurement, declaration, and calibration not enforcement. The manufacturer is duly informed, the department is authorised, and the tax base is established with predictability. Subsequently, there is a shift in tone and implications. Once capacity is established and duty liability quantified, the remaining rules pertain to payment discipline, interest, penalties, recovery, and statutory consequences. This transition from determination to compliance and enforcement—is addressed in Part II of this commentary.
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