Government Introduces New Tax Regime for Tobacco and Pan Masala From February 1

New Delhi, Jan 2026 : The Union government is set to roll out a revised tax structure for cigarettes, tobacco products and pan masala from February 1, with the objective of tightening regulation, curbing tax evasion and maintaining a high tax burden on what it classifies as “sin goods.”

Under the new framework, cigarettes and other tobacco products will attract an additional excise duty, while pan masala will be subject to a newly introduced health and national security cess. These levies will replace the existing compensation cess that has been in force since the introduction of the Goods and Services Tax (GST) in July 2017. The products will continue to attract 28 per cent GST, but the revised structure is designed to strengthen compliance and monitoring.

A major change under the new regime is the introduction of an MRP-based valuation system for several tobacco products, including chewing tobacco, filter khaini, jarda scented tobacco and gutkha. Instead of being taxed on factory or transaction value, GST will now be calculated on the maximum retail price printed on the packet. Officials believe this move will significantly reduce under-reporting and improve overall tax collections from the sector.

Pan masala manufacturers will also face stricter compliance requirements. From February 1, they will be required to obtain fresh registration under the newly notified health and national security cess law. In addition, manufacturers must install CCTV cameras covering all packing machines and maintain video recordings for a minimum period of two years.

The new rules further mandate that companies disclose the number of machines installed at their factories along with their production capacity to the excise authorities. To account for operational downtime, manufacturers will be permitted to seek a proportional reduction in excise duty if any packing machine remains non-functional for 15 consecutive days.

Despite the structural changes, the government has clarified that the overall tax incidence on pan masala will remain broadly unchanged. Including GST and the new cess, the total tax burden is expected to stay close to the current level of around 88 per cent, ensuring that consumption of such products continues to be strongly disincentivised while safeguarding government revenue.