Lok Sabha passes Bill to levy excise duty on tobacco

• The Lok Sabha passed a law to levy a higher excise duty on tobacco and related products once the GST compensation cess ends.

• The Central Excise (Amendment) Bill, 2025, was passed by a voice vote in the Lower House.

Why the govt brings in this amendment Bill?

• With the introduction of the Goods and Services Tax (GST) on July 1, 2017, the Central Excise Act, 1944 was repealed by section 174 of the Central Goods and Services Tax Act, 2017, except in respect of goods listed under Entry 84 of List I of the Seventh Schedule to the Constitution. 

• This includes tobacco and tobacco products. 

• With the levy of GST and compensation cess on tobacco and tobacco products, the rates of central excise duties were reduced significantly to allow for the levy of compensation cess without large impact on their tax incidence.

• Compensation cess levied on tobacco and tobacco products, wherever applicable, will be discontinued once interest payment obligations and loan liabilities under the compensation cess account are completely discharged. 

• In order to give the government the fiscal space to increase the rate of central excise duty on tobacco and tobacco products so as to protect tax incidence, it is imperative to amend the table in Section IV of the Fourth Schedule to the said Act.

• The Central Excise (Amendment) Bill, 2025 is introduced to substitute the table containing the tariff rates of tobacco and tobacco products in Section IV of the Fourth Schedule to the Central Excise Act, 1944.

• Currently, a 28 per cent Goods and Services Tax (GST) plus cess at a varied rate is levied on tobacco and related products.

• The Bill proposes to levy an excise duty of 60-70 per cent on unmanufactured tobacco. 

• Excise on cigars and cheroots is proposed at 25 per cent or Rs 5,000 per 1,000 sticks, whichever is higher.

• Cigarettes, depending on length and filter, are proposed to be taxed in the range of Rs 2,700-Rs 11,000 per 1,000 sticks, while chewing tobacco is taxed at Rs 100 per kg.

• At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for five years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.

• The levy of compensation cess was later extended by four years till March 31, 2026, and the collection is being used to repay the Rs 2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period.

(The author is a trainer for Civil Services aspirants.)