The government has moved to restore excise duty on cigarettes to ensure they “do not become affordable” once the GST compensation cess ends, Finance Minister Nirmala Sitharaman said on December 3 during her reply to the discussion on the Central Excise (Amendment) Bill, 2025 in the Lok Sabha.
Sitharaman said the removal of the compensation cess would otherwise reduce the effective tax burden on cigarettes, since the GST law caps the maximum rate at 40 percent. “We certainly don't want cigarettes to become affordable,” she said, emphasising that the deterrent structure of taxation must be preserved.
She added that before the introduction of the Goods and Services Tax (GST), tobacco taxes in India were raised annually as part of a public-health strategy to discourage smoking. “In India rates of tobacco have been increased annually before GST. So, it is primarily a health-related concern, it has to be a deterrent of tax, price, so that people don't get into that habit. But after the sunset of compensation cess, we are bringing back the excise duty prior to GST,” she said.
Stagnating affordability
The Minister’s remarks echo concerns among policymakers and health researchers that cigarette affordability has either stagnated or improved in the past decade. Affordability — measured as price relative to consumer purchasing power — has not worsened despite multiple tax revisions, suggesting that rising incomes have offset tax-linked price increases.
With GST’s 40 percent statutory ceiling, the removal of the compensation cess would leave a structural gap that lowers the total tax burden, unless an excise layer is reinstated. The amendment aims to fill that gap and retain the existing level of deterrence.
Global context on tobacco taxation
Several countries adjust tobacco taxes annually to prevent real price erosion. Australia and New Zealand link tobacco tax increases to inflation, ensuring prices rise consistently. The European Union mandates a minimum excise burden of 60 percent of the retail price of cigarettes.
India’s pre-GST regime similarly relied on regular excise hikes. The proposed changes therefore bring back an older framework that allowed more frequent price adjustments for health reasons.
Reintroducing excise duty will help prevent any unintended drop in tax incidence once the cess sunsets.
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