The stasis in India’s tobacco taxation regime since the introduction of the GST in 2017 was decisively broken last year. Deliberations at the 56th meeting of the GST Council in September 2025 followed by a series of legislative actions ushered in one of the most significant restructurings of tobacco taxation in a decade. Together, the GST rate revisions, amendments to the central excise framework, and introduction of the Health Security se National Security Cess represent a substantive reconfiguration.
These reforms, rolled out from February 1, are best understood as an integrated attempt to address fiscal priorities while responding to long-standing public health concerns. Three core changes define the new framework. First, the recalibrated GST rates. Most tobacco products have been moved from the 28 percent slab to the peak rate of 40 percent, while bidis have been shifted in the opposite direction, from 28 percent to 18 percent.
Second, the tax base for cigarettes, pan masala and smokeless tobacco has shifted from transaction value to the retail sale price—a move intended to curb under-declaration and strengthen compliance.
Third, central excise duties have been reintroduced and revised significantly, ensuring that the overall tax burden on cigarettes is increased despite the sunset on the compensation cess.
From both public finance and public health perspectives, several elements of this reform merit a positive assessment. The overall tax burden on cigarettes is estimated to rise from about 55 percent of the retail price to roughly 66 percent. This is a substantial increase and moves the country closer to benchmarks that view higher prices as one of the most effective tools for reducing tobacco consumption, especially among young and price-sensitive users.
Equally important is the re-emergence of central excise duties as the dominant component of tobacco taxation. Unlike GST, which is governed by consensus-based decision making, excise duties fall squarely within the Union government’s fiscal authority. This institutional shift restores a degree of fiscal sovereignty in tobacco taxation, allowing the Centre to respond more quickly to inflation, consumption trends and health priorities.
The introduction of the Health Security se National Security Cess Bill, 2025 adds another dimension. By explicitly earmarking revenues for health-related purposes, the cess helps institutionalise a link between tobacco taxation and the financing of tobacco-related health externalities. While earmarking is not without its critics in public finance theory, in this context it carries symbolic and practical significance by reinforcing the rationale for higher tobacco taxes beyond mere revenue mobilisation.
Yet, despite these advances, the reforms also reveal important limitations that could dilute their public health impact if left unaddressed.
First, even after the recent increases, the effective tax burden on cigarettes is still expected to remain below 75 percent of the retail price, a benchmark widely recognised as an international best practice. The gap is even wider for bidis and smokeless tobacco products.
Second, the treatment of bidis raises particularly serious concerns. The reduction of the GST rate on bidis to 18 percent, combined with the introduction of a 10 percent excise duty, results in an overall tax burden of around 22 percent. This is dramatically lower than the roughly 66 percent now applicable to cigarettes.
Bidis are the second-most widely consumed tobacco product in India, used by an estimated 72 million adults, and are strongly associated with oral and lung cancer. Maintaining such a large tax differential between cigarettes and bidis raises questions of both equity and effectiveness, as it disproportionately exposes lower-income populations to tobacco-related harm.
Third, the structure of bidi taxation itself remains problematic. The exclusive reliance on ad valorem duties for both excise and GST limit the effectiveness of taxation as a demand-reduction tool. From a tobacco control perspective, inflation-adjusted specific excise taxes are generally preferred because they reduce price gaps between premium and low-cost products and limit opportunities for down-trading.
Finally, the shift to retail price-based taxation for cigarettes and smokeless tobacco is conceptually sound but administratively demanding. Its success will depend critically on the capacity of tax authorities to monitor, verify and enforce declared retail prices across a market characterised by a large number of brands and frequent product segmentation. Strong enforcement will be the key.
India, as a party to the WHO Framework Convention on Tobacco Control, has committed to uniformly high taxation across all tobacco products as a core demand-reduction strategy. The continued preferential treatment of bidis, taxed at roughly one-third the effective rate applied to cigarettes, limits the extent to which the reforms protect populations that bear a disproportionate burden of tobacco-related disease.
There is a compelling case for advancing the current reform agenda with a stronger political resolve. Rationalising bidis through a shift from ad valorem to specific excise duties, aligning their GST rate with the 40 percent peak and extending the health security cess to cover all tobacco products would materially strengthen the effectiveness of tobacco taxation.
These measures would address persistent structural distortions, reinforce price-based demand reduction and ensure that India’s tobacco tax policy is commensurate with the scale of its non-communicable disease burden, delivering sustained public health gains alongside fiscal prudence.
Rijo M John | Health economist and Professor, Rajagiri College of Social Sciences, Kochi
(Views are personal)