When Valuation Fails, Control Returns: The Policy Logic of Capacity-Based Central Excise
As taxation systems mature, they typically advance towards simplicity, trust, and self-assessment. Conversely, regression in such systems is seldom accidental. The reintroduction of a machine-capacity-based excise levy on gutkha, pan masala containing tobacco, chewing tobacco, jarda, and similar products, effective from 1 February 2026, is not merely a fiscal decision; it represents a diagnostic policy signal. It signifies the State's recognition that, in certain sectors, traditional valuation-based taxation has consistently failed.
Where value declarations become unreliable and accounting trails fragile, taxation inevitably migrates towards physical control. In this sense, the revival of capacity-based excise is not a retreat to older methods, but a response to contemporary compliance realities in an industry characterised by high-volume, low-value products, fragmented distribution, and persistent under-reporting.
Central Excise Notification Package of 31.12.2025 - An Overview at a Glance
To operationalise this policy shift, the Government has issued a comprehensive set of six Central Excise notifications on 31 December 2025, forming a single, integrated legislative package. Of these, two notifications have been issued under the Central Excise (C.E.) series, namely Notification No. 03/2025-Central Excise and Notification No. 04/2025-Central Excise, which primarily deal with the levy structure, duty framework, and valuation architecture applicable to specified tobacco and allied products. The remaining four notifications fall under the Central Excise (Non-Tariff) [C.E.(N.T.)] series, being Notification No. 03/2025-C.E.(N.T.) to Notification No. 06/2025-C.E.(N.T.), and these address the machinery provisions, procedural rules, capacity determination, machine registration, operational controls, and compliance mechanisms necessary to administer a machine-based levy regime. Read together, these six notifications do not operate in isolation; they collectively redesign the way duty is quantified, monitored, and enforced in this sensitive sector. Accordingly, the discussion that follows examines these notifications not merely as individual legal instruments, but as coordinated components of a single regulatory framework intended to shift the tax base from transactional value to productive capacity.
From Policy Framework to Statutory Mechanics - Setting the Stage for Detailed Analysis
Having outlined the contours of the notification package as a unified policy response, it is now necessary to descend from legislative design to statutory execution. Each notification performs a distinct legal function within the overall architecture - some restructure the basis of levy and valuation, while others prescribe the procedural machinery through which capacity is measured, and duty is enforced. For practitioners and industry alike, understanding this sequence is critical because compliance obligations flow not from policy intent but from the precise wording of statutory instruments. The discussion, therefore, begins with the notifications that redefine the levy itself, before moving on to those that operationalise the system through registration, machine declaration, capacity determination, and production monitoring. This progression mirrors the way the law itself is meant to function - first determining what is to be taxed, and only thereafter prescribing how that tax is to be administered.
TARIFF NOTIFICATIONS - NOTIFICATION NOS. 03/2025-C.E. AND 04/2025-C.E. (31.12.2025)
From Continuity to Control: The Shift from Notification No. 03/2019 to Notification No. 03/2025 under Central Excise
Even after the introduction of GST in July 2017, tobacco products were deliberately retained under the Central Excise regime alongside GST and Compensation Cess. This reflected a consistent policy approach that goods harmful to public health should remain subject to enhanced fiscal and regulatory supervision.
In this backdrop, Notification No. 03/2019-Central Excise dated 06.07.2019, issued under Section 5A (1), largely served a stabilising purpose. It preserved moderate excise duty rates across various tobacco products and ensured continuity of excise administration in the post-GST environment, without fundamentally altering industry behaviour or consumption patterns. In effect, it was a regulatory maintenance notification rather than a policy transformation.
However, persistent concerns relating to high consumption of chewing tobacco and gutkha, revenue leakages, valuation disputes, and weak production monitoring gradually exposed the limitations of transaction-based taxation. Global public-health experience has repeatedly shown that price and production controls tend to be more effective deterrents than nominal rate structures alone.
These realities prompted a strategic shift, which materialised through Notification No. 03/2025-Central Excise dated 31.12.2025. This notification expressly supersedes the 2019 notification and marks a decisive policy reset. The new notification significantly enhances duty rates-particularly on chewing tobacco, Jarda, and gutkha-at substantially higher levels, thereby converting excise duty into a behavioural deterrent rather than merely a revenue tool. More importantly, it operates in coordination with machine-based capacity taxation under Section 3A and stricter MRP-linked valuation mechanisms, moving the levy away from pure transaction value and closer to production and retail price control.
Thus, while Notification No. 03/2019-C.E. ensured the survival of excise in a GST-dominated regime, Notification No. 03/2025-C.E. restores excise as an active regulatory instrument, influencing not just tax liability but also manufacturing practices, pricing strategies, and compliance architecture. For manufacturers and professionals alike, the compliance focus now shifts decisively from classification disputes to capacity determination, machine registration, production tracking, and MRP discipline-signalling the Government's renewed reliance on excise as a tool for both revenue protection and public health policy.
From Transaction-Based Levy to Capacity-Based Control: The Policy Rationale Behind Notification No. 04/2025-C.E. (N.T.) dated 31.12.2025 (effective from 01.02.2026):
While Notification No. 03/2025-Central Excise recalibrates duty rates, Notification No. 04/2025-Central Excise dated 31.12.2025 addresses a more structural concern-how excise duty is to be assessed and controlled at the manufacturing stage itself. Issued in exercise of powers under Section 3A of the Central Excise Act, 1944, this notification operationalises the Government's shift towards machine-based capacity taxation for specified tobacco products, particularly gutkha, chewing tobacco, and Jarda scented tobacco.
Historically, transaction-value-based taxation in these segments posed serious enforcement challenges due to under-reporting of production, unaccounted clearances, and difficulties in tracking actual output. Notification No. 04/2025 responds to this reality by linking excise liability not to sales, but to the number and technical specifications of packing machines installed and operated in the factory. In doing so, the law moves from taxing "what is declared as sold" to regulating "what is physically capable of being produced."
Under this framework, manufacturers are required to declare their installed machines, obtain formal determination of production capacity, and discharge duty based on notified monthly rates per machine, irrespective of actual clearances. This mechanism substantially reduces discretion, valuation disputes, and evidentiary litigation risks while simultaneously strengthening the department's real-time production monitoring.
Importantly, Notification No. 04/2025 does not function in isolation. It operates in close coordination with Notification No. 03/2025 (rate restructuring) and allied procedural notifications governing machine registration, sealing, unsealing, and production suspension. Together, these measures revive a familiar pre-GST and pre-VAT excise strategy-controlling capacity rather than merely auditing invoices-but now deployed in a more targeted and technology-assisted environment.
In policy terms, this reflects a decisive acknowledgement that in sectors prone to evasion and high public-health risk, administrative certainty and production discipline are more effective than post-facto tax verification. Excise duty thus re-emerges not only as a fiscal levy but as a regulatory instrument shaping how, how much, and at what scale tobacco products can be manufactured.
"जब लेखा झूठा बोलने लगे,तो मशीन सच बताती है,जब काग़ज़ थक जाए गिनते,तो क्षमता खुद गवाही देती है।"[When accounts begin to lie, machines speak the truth;When papers grow tired of counting, capacity itself bears witness.]
NON-TARIFF NOTIFICATIONS - NOTIFICATION NOS. 03/2025-C.E. (N.T.) TO 06/2025-C.E. (N.T.), ALL DATED 31.12.2025
Notification No. 03/2025-Central Excise (N.T.): The Trigger Point
By appointing 1 February 2026 as the effective date, Notification No. 03/2025-Central Excise (N.T.) dated 31.12.2025 brings into force the provisions of the Central Excise (Amendment) Act, 2025. This notification activates the charging mechanism under Section 3A, signalling that manufacturers must now prepare to be taxed on manufacturing capacity rather than reported output. It marks the formal departure point from trust-based assessment in this sector.
At the core of this regime lies Section 3A of the Central Excise Act, 1944, which authorises the levy of excise duty based on the production capacity of notified goods. Historically, this provision has been used only where the tax administration has reached a tacit conclusion that valuation-based mechanisms are ineffective. Industries such as pan masala, gutkha, textile processors, and steel re-rollers were earlier subjected to similar regimes. Tobacco products have now been reinstated in this category.
Once goods fall under Section 3A, actual production ceases to be the primary basis for taxation. Instead, output is deemed based on machine specifications-such as speed, number of tracks, and pouch dimensions-and such deemed production becomes the legal reality. Consequently, the burden shifts to the assessee to either accept this presumption or seek relief strictly through statutory procedures.
When Commercial Reality Collides with Legal Presumption
To understand the practical impact of this regime, consider a manufacturer producing ₹1 pouches of chewing tobacco who installs two multi-track packing machines, each capable of packing 400 pouches per minute. Under the notified tariff, excise duty may be fixed at, say, ₹45 lakh per machine per month. With two machines installed, the excise liability becomes ₹90 lakh per month.
What renders this regime commercially and psychologically unsettling for businesses is not merely the magnitude of duty, but the law's indifference to market realities. Even if sluggish demand restricts monthly sales to ₹30 lakh, the excise liability remains ₹90 lakh. Demand fluctuations, working capital stress, and distribution bottlenecks are not recognised in the tax computation. The statute acknowledges only one fact-installed capacity.
This rigidity intensifies where machines are idle. Under traditional excise or GST regimes, reduced production naturally meant reduced tax. Under Section 3A, however, the mere presence of an unsealed machine continues to trigger duty. An inoperative machine remains, in law, a machine capable of production, and such potential alone suffices to attract tax.
Relief exists, but it is procedural rather than sympathetic. Duty reduction is permitted only when machines are formally sealed under departmental supervision and production is fully suspended for a continuous minimum period as prescribed. Any procedural lapse revives the presumption of full capacity utilisation.
Levy of GST and Central Excise: Dual Burden without Credit
An additional layer of complexity arises from the coexistence of excise duty with GST. Capacity-based excise duty operates independently of GST, which continues to apply on outward supplies. Unlike GST, excise duty paid under Section 3A does not flow as input tax credit under the GST framework. It becomes embedded in cost structures, directly impacting pricing, margins, and competitiveness.
This dual levy reality reinforces the regulatory nature of the regime. The intent is not merely revenue collection but behavioural discipline-by raising production costs and discouraging high-volume low-price consumption patterns.
Tax Planning Now Begins with the Machine
Perhaps the most significant transformation brought about by this levy lies in tax planning itself. Earlier, advisory discussions focused on valuation, classification, invoicing, and documentation. Under the revived Section 3A framework, planning migrates upstream.
Decisions regarding how many machines to install, their operational speed, the number of tracks, and the duration of operation now carry direct tax consequences. The machine, once merely a production tool, becomes the primary determinant of tax.
Seen in this light, the return of capacity-based excise is not regressive; it is reactive. It reflects the State's assessment that when accounting control repeatedly fails, taxation must rely on physical control.
The enduring lesson of this regime may be captured in a single line:In certain industries, the law no longer taxes what you report; it taxes what you are capable of producing.
Bringing Products under Physical Control - Declaration of 'Notified Goods' under Section 3A - Notification No. 04/2025-C.E.(N.T.) dated 31.12.2025 (effective from 01.02.2026)
This notification has been issued pursuant to the powers conferred under Section 3A of the Central Excise Act, 1944, a provision that authorizes the Government to transition from value-based taxation to capacity-based levy concerning goods where conventional assessment mechanisms are deemed ineffective. The issuance of this notification formally initiates the statutory application of the machine-based levy framework to designated tobacco products, thereby categorizing them under a special regulatory regime governed not solely by transaction value but also by the productive capacity of manufacturing units.
This notification explicitly declares Chewing Tobacco, Filter Khani, Jarda Scented Tobacco, and Gutkha as "notified goods" under Section 3A. This designation is more than just a description; it has significant legal implications. Once goods are classified as notified under Section 3A, the duty payable does not depend on the actual quantity cleared or the invoice value. Instead, the tax is based on the number of packing machines, their capacity, and the period they are considered operational, according to the rules and procedures specified in separate notifications.
The legislative philosophy underpinning this transformation is founded upon administrative experience. In sectors characterized by rapid packaging processes, decentralized distribution networks, and historically weak audit mechanisms, post-clearance verification of turnover frequently proves insufficient. By designating these products as notified goods, the legislation intentionally substitutes retrospective scrutiny with ex-ante control, whereby tax is secured in advance based on production capacity rather than reported sales. This approach also diminishes the potential for disputes regarding under-valuation, suppressed clearances, and parallel accounting practices, which have traditionally imposed prolonged burdens on both industry and the Department through litigation
From a compliance standpoint, this notification marks the start of a new regulatory framework. Manufacturers dealing with these notified goods must now adhere to a vastly different compliance system - one requiring machine registration and declaration, periodic capacity checks, sealing and de-sealing procedures, and fixed monthly duty payments, regardless of market fluctuations or sales performance. As a result, even manufacturers with lower demand might still owe duties based on their installed capacity unless they follow proper procedures for machine closure or suspension as per the rules.
Thus, Notification No. 04/2025-Central Excise (N.T.) does not merely expand a list of products; it fundamentally alters the basis on which tax liability arises for these goods. By invoking Section 3A and declaring specified tobacco products as notified goods, the Government has clearly signalled that, in this segment of the industry, control of production has replaced trust in declarations as the cornerstone of revenue protection
Notification No. 05/2025-Central Excise (N.T.) (31.12.2025)but applicable from 01.02.2026: When Compliance Begins Before Production
Once the Government decided to tax manufacturing capacity rather than declared production, a logical and immediate concern arose: how will the department always know the true capacity of a factory? Notification No. 05/2025-Central Excise (N.T.), issued on 31 December 2025, answers this question with clarity and firmness by notifying the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026, applicable from 1 February 2026.
This notification is built on a single foundational assumption-that capacity-based taxation can succeed only when there is absolute transparency about machines. The law, therefore, places the responsibility squarely on the manufacturer to keep the department continuously informed about every fact that affects capacity.
Under earlier regimes, factory modifications often went unnoticed unless they led to increased production or sales. Machines could be added discreetly, internally modified, or kept as standby units without immediate tax consequences. Notification No. 05/2025-C.E. (N.T.) intentionally dismantles this complacency. It treats every alteration in machinery as a tax-relevant event, irrespective of whether production has commenced or sales have taken place.
Manufacturers are required to give prior intimation regarding installation, removal, sealing, de-sealing, or any modification of machines. The relevant factor is not actual utilisation but potential for use. Once such potential exists, the law mandates disclosure. Silence shall no longer be viewed as legally neutral; in legal terms, non-disclosure may indicate suppression.
Overview of the Broad Structure of the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules 2026
For the benefit of readers and practitioners, it is important to appreciate that the notified Rules comprehensively regulate the entire compliance life-cycle of capacity-based excise. The Rules cover the entire compliance life-cycle, beginning with definitions and applicability, moving through factors relevant to production, deemed quantity, declarations by manufacturers, verification by officers, capacity determination, duty calculation and abatement, and extending further into procedures for de-sealing, payment of duty and interest, retail sale price declaration, determination of RSP where improperly declared, installation of CCTV systems, addition or removal of machines, and finally penal consequences for contraventions.
From this structure, it becomes evident that the Rules are not confined to duty computation alone. They govern physical surveillance, packaging controls, production assumptions, sealing procedures, payment timelines, and penal consequences. In effect, they convert the factory itself into a regulated compliance ecosystem.
Given the breadth and operational intensity of these provisions, a detailed rule-wise analysis is beyond the scope of the present article. The Author proposes to examine these Rules in depth in a separate dedicated article, focusing on practical compliance challenges, litigation risks, and procedural safeguards for manufacturers.
From a compliance philosophy perspective, Notification No. 05/2025-C.E. (N.T.) clearly signals the Government's preference for preventive supervision over corrective audits. Explanations after detection carry limited value in this framework; what matters is advance disclosure, procedural adherence, and physical verifiability.
In short, under the revived Section 3A regime, compliance begins not at the time of clearance or sale, but even before the machine is switched on.
Notification No. 06/2025-Central Excise (N.T.) dated 31.12.2025 - Precision in RSP-Based Valuation
Section 4A mandates valuation based on the Retail Sale Price (RSP) where goods are statutorily required to be printed with MRP. Notification No. 01/2022-C.E. (N.T.) had earlier specified chewing tobacco and pan masala containing tobacco with 55% abatement. Notification No. 06/2025-C.E. (N.T.) substitutes the phrase "pan masala containing tobacco" with "gutkha", ensuring greater product precision and removing interpretational ambiguity. Valuation thus remains RSP-based after abatement, independent of transaction value.
Illustrations
Illustration A - Chewing TobaccoRSP: ₹100 | Abatement: 55% | Assessable Value: ₹45
Illustration B - Gutkha (post-01.02.2026)RSP: ₹120 | Abatement: 55% | Assessable Value: ₹54
Thus, even under a capacity-based levy, retail price discipline remains a parallel regulatory tool.
Concluding Thoughts- When Law Chooses Certainty Over Comfort
The revival of capacity-based excise is not a failure of legislation; it is a response to repeated failure of compliance. When value declarations become negotiable and accounting trails unreliable, taxation inevitably gravitates towards physical certainty.
For manufacturers, this regime demands strategic restraint, procedural discipline, and careful calibration of installed capacity. For professionals, it requires mastery not only of law and rates but also of machinery, production mechanics, and regulatory behaviour. Compliance is no longer confined to books of accounts; it now lives on the factory floor.
"हिसाब से जब भरोसा उठ जाए,तो नीयत नहीं, क़ुदरत तौली जाती है।"
[When trust in accounts collapses,it is not intent but capacity that gets measured.]
Ultimately, capacity-based excise is not about harsher taxation alone; it is about restoring credibility where voluntary compliance has eroded. It reflects the State's firm belief that in sensitive and high-risk industries, predictability and control must prevail over persuasion.
And perhaps, the deepest lesson of this regime is simple yet profound: When trust breaks down, the law stops listening to words-and starts measuring reality.
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