The Government of India has officially notified significant changes to tobacco taxation effective February 1, with cigarettes and tobacco products now attracting 40% GST while bidis will face 18% GST. The new framework replaces the existing GST compensation cess and introduces a machine capacity-based excise duty system designed to curb tax evasion in the tobacco sector.

New Tax Structure and Implementation

The Finance Ministry's notification confirms that the Health and National Security Cess on pan masala and additional excise duty on tobacco products will be levied over and above the revised GST rates. This comprehensive overhaul marks the end of the GST compensation cess regime that has been in place since 2017.

Machine Capacity-Based Excise Duty Framework

The government has introduced the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026. Under Section 3A of the Central Excise Act, manufacturers must pay excise duty based on the determined annual capacity of production rather than reported production volumes.

The capacity-based system addresses widespread evasion through undeclared or intermittently operated packing machines. Manufacturers will pay duty based on retail sale prices and maximum rated machine speed during verification periods.

Excise Duty Calculation Examples

The notification provides specific calculation methods for different machine capacities and retail sale prices:

Manufacturers installing machines mid-month must pay full monthly duty regardless of actual production days, as per Rule 13(3).

Industry Impact and Price Projections

Industry sources continue to project cigarette price increases of 20.00%-30.00% as manufacturers adjust to the higher tax burden. The shift from compensation cess to the new excise duty framework represents one of the most significant changes to India's sin-tax structure since GST implementation.

Constitutional Framework and Compliance

The government maintains constitutional validity under Article 270 and Entry 97 of the Union List. The compliance framework requires upfront declaration of machine parameters, Chartered Engineer certification, and CCTV monitoring to ensure accurate capacity determination and prevent manipulation of production reporting.

The Directorate General of Foreign Trade (DGFT) has extended import restrictions on low-ash metallurgical coke for an additional six months, spanning from January 1 to June 30, 2026. The decision continues the regulatory approach toward this critical steelmaking ingredient, impacting coal mining companies and steel manufacturers across the industry.

Scope of Import Restrictions

The restrictions specifically target metallurgical coke with particular ash content specifications. The policy creates a clear distinction between different types of metallurgical coke based on their ash content levels.

Exemptions from Restrictions

The notification clarifies that certain categories of metallurgical coke remain outside the scope of these import limitations. High-ash content metallurgical coke, specifically those with ash content above 18%, continues to be freely importable without regulatory constraints.

Additionally, other metallurgical coke imports not falling under the low-ash category maintain their unrestricted status, ensuring continued availability for industrial requirements.

Policy Continuity and Industry Impact

This extension represents a continuation of the government's regulatory framework for metallurgical coke imports. The previous restriction period concluded on December 31, 2025, making this announcement a seamless transition to maintain policy consistency.

Industrial Significance

Low-ash metallurgical coke serves as a crucial input in steelmaking processes, where its quality directly impacts steel production efficiency and output quality. Beyond steel manufacturing, this material finds applications across various industrial sectors, making its availability and pricing significant for multiple industries.

The selective restriction approach, focusing only on low-ash variants while keeping high-ash content coke unrestricted, demonstrates the government's balanced strategy to address specific market concerns while maintaining industrial supply chain stability.