GST on cigarettes and tobacco products: No immediate tax rate hike; here's why

The Goods and Services Tax (GST) Council approved a new 40% slab for luxury and sin goods to be implemented from September 22, 2025. However, it said that tobacco and related products will be exempted until loans are repaid.

At its 56th meeting, the council on Wednesday, September 3, approved the two-slab system—5% for essential (merit) goods and 18% for standard items. Along with this, it approved the central government’s proposal to introduce a special 40% tax on sin and high-end luxury goods.

While tobacco and related products, including pan masala, gutkha, cigarettes, chewing tobacco, zarda, unmanufactured tobacco and bidi, fall under the sin product category, they will remain under the current tax system of 28% GST plus compensation cess until a later date.

“As per recommendations of the GST Council in its 56th meeting, the changes in GST rates on services and goods other than cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and beedi will be effective from 22nd September, 2025. For the specified goods namely, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and beedi, the existing rates of GST and compensation cess will continue to apply and the new rates will be implemented at a later date to be notified, based on discharging of entire loan and interest liabilities on account of compensation cess,” the Ministry of Finance said in a release on September 3.

Sin tax

Sin taxes are applied to goods that are considered harmful to society. The government raises the price to discourage consumption and also generate more revenue for public welfare.

Taxes on sin goods are highly price-inelastic, which means that even if the prices increase, many people will still buy them. This generates higher revenue for the government that can be used in welfare programs.

Currently, cigarettes attract 28% GST plus a compensation cess, which is a combination of specific and ad valorem duties. Ad valorem taxes are levied as a percentage of the product cost, and specific taxes are levied as a fixed amount per unit, regardless of the product’s price.

For example, a specific tax would be ₹2 per cigarette, while ad valorem would be 10% of the cigarette price (that can translate to ₹1.8 for one that costs ₹18).

Many other goods placed under the 40% slab, including luxury and premium cars, sugary and flavoured drinks, will start attracting higher tax starting from September 22, 2025.