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Tobacco Tax Shake-Up: Govt Eyes New Levy Options
25 Nov
Summary
- Government exploring options to replace tobacco compensation cess.
- GST rationalization on tobacco products remains paused.
- New tax levy might be announced in the 2026 Union Budget.
The Indian government is currently evaluating several potential methods to substitute the existing compensation cess applied to tobacco products. These considerations aim to restructure the taxation framework for tobacco without causing a disruption in central revenue streams. Discussions between the Finance Ministry and the Prime Minister's office are underway, though no definitive resolution has been reached.
Multiple avenues are being explored. One prominent option involves moving tobacco taxation entirely outside the Goods and Services Tax (GST) regime. This approach would prevent revenue collections from being shared with the states. Another proposal suggests integrating the levy into the National Calamity Contingent Duty. Alternatively, a completely new cess could be introduced, or the current tax could be retained under a different nomenclature.
The implementation of increased GST rates on sin goods, including cigarettes and tobacco, has been postponed. The compensation cess will remain in effect until the government settles outstanding loans taken to compensate states for revenue shortfalls. Sources suggest that any new levy might be announced as part of the 2026 Union Budget. This potential shift in taxation follows warnings from FICCI regarding the impact of higher GST rates on the illicit tobacco market.
