TAXING ONE PRODUCT, IGNORING REST: WHY INDIA'S TOBACCO STRATEGY IS FAILING

On the final day of 2025, the government announced that effective February 1, 2026, tobacco products will attract an additional excise duty over and above the 40% GST rate.

- RAJESH MEHTA

This new levy replaces the GST Compensation Cess imposed on such sin goods. The move is supposedly aimed at preserving high effective tax rates after the cess sunset, mobilizing resources for health and national security priorities, and deterring tobacco consumption through steeper taxation, particularly on cigarettes and pan masala.

Yet while the 40 percent GST rate is applied uniformly in principle, the accompanying duty hikes and structural redesign of the tax regime produce sharply uneven outcomes across tobacco categories. Premium and longer cigarettes, along with chewing tobacco products, bear the brunt of the new framework. Bidis, by contrast, remain largely insulated: they are excluded from the 40 percent “sin tax” slab and continue to be taxed at a lower GST rate of 18 percent.

Data from the Global Adult Tobacco Survey (GATS-2, 2016-17) underscores this imbalance. Bidi smoking is significantly more prevalent than cigarette smoking in India, with 7.7 percent of the adult population reporting bidi use compared to just 4 percent who smoke cigarettes. In other words, bidi smokers nearly outnumber cigarette smokers by two to one. Therefore, this increase does little to address the objective of deterring tobacco consumption through steeper taxation.

EMPLOYMENT STRUCTURE IN TOBACCO PRODUCTION