Amid widespread confusion following the government's decision to impose fresh excise duty on cigarettes, the Finance Ministry has clarified that the National Calamity Contingent Duty (NCCD) will continue to remain applicable on cigarettes from February 1, 2026.
According to Finance Ministry sources, the new tax structure for cigarettes will consist of three components: 40% GST, newly imposed Central Excise Duty and the existing NCCD. This clarification puts to rest speculation that NCCD may be subsumed under the revised excise framework.
Revised Tobacco Tax Structure from February 1, 2026
The government has notified February 1, 2026, as the effective date for levying additional excise duty on tobacco products and a health cess on pan masala, replacing the existing GST compensation cess on these 'sin goods'.
As per the notifications issued by the Finance Ministry on December 31, 2025, the revised structure will be as follows:
Cigarettes & Tobacco Products:
- 40% GST
- Additional Central Excise Duty
- Existing NCCD (category-wise)
Pan Masala:
- 40% GST
- Health Se National Security Cess (over and above GST)
Biris:
- 18% GST
- Additional excise duty applicable from February 1, 2026
NCCD Continues Alongside New Excise Duty
Finance Ministry sources clarified that NCCD will not be withdrawn and will continue as a separate levy. The duty varies based on the length and filter of cigarettes, with tax rates ranging from Rs. 2,050 to Rs. 8,500 per 1,000 sticks.
Global brokerage firm Jefferies, in a note dated January 1, highlighted the significant impact of the revised tax regime, stating that the overall tax hike could exceed 30% if NCCD continues and would still remain above 20% even if it were subsumed.
Higher Duties on Chewing Tobacco, Gutkha and Pan Masala
The government has also introduced a new MRP-based valuation mechanism for certain tobacco products, including chewing tobacco, filter khaini, jarda scented tobacco, and gutkha. Under this mechanism, GST valuation will be determined based on the retail sale price (RSP) declared on the package.
The additional excise duty rates notified are:
- Gutkha: 91%
- Chewing Tobacco: 82%
- Jarda Scented Tobacco: 82%
Further, the health cess on pan masala will be levied based on the production capacity of manufacturing units.
Revenue Sharing with States
The proceeds from the newly imposed excise duty will form part of the Centre's divisible pool, of which 41% will be shared with states as per the recommendations of the Finance Commission.
Additionally, a portion of the revenue collected through the health cess will be distributed to states for health awareness initiatives and other health-related schemes.
Finance Minister Nirmala Sitharaman, while addressing Parliament last month, stated that the objective of the health and national security cess is to create a "dedicated and predictable resource stream" for two critical national priorities - health and national security.
End of GST Compensation Cess
Currently, tobacco products attract 28% GST along with a compensation cess at varying rates. However, the GST Council had decided in September last year that the compensation cess would cease after repayment of loans taken to compensate states for GST revenue losses during the Covid period.
The Centre had borrowed Rs. 2.69 lakh crore, which is scheduled to be fully repaid by January 31, 2026. The compensation cess, originally introduced along with GST on July 1, 2017, was first applicable for five years and later extended till March 31, 2026, solely for loan repayment purposes.
Key Takeaway
With the continuation of NCCD, introduction of fresh excise duty, and higher GST rate of 40%, the tax burden on cigarettes and other tobacco products will rise sharply from February 1, 2026. The move reinforces the government's dual objective of discouraging consumption of sin goods while ensuring stable revenue streams for health, national security, and state finances.
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