The Central Excise (Amendment) Act, 2025

Context

The Government of India has notified the Central Excise (Amendment) Act, 2025, introducing significant tax structural changes for tobacco products effective from February 1, 2026. This legislative move coincides with the expiration of the GST Compensation Cess and aims to harmonize fiscal goals with public health objectives by ensuring tobacco remains high-priced.

About the Act

• Primary Objective: Amends the Central Excise Act, 1944 to revise duties on tobacco products, which are among the few items remaining outside the comprehensive GST framework.
• Fiscal Strategy: The Act seeks to maintain and increase the overall tax burden on tobacco to prevent a price drop once the GST compensation cess ends.
• Public Health Alignment: Follows global health guidelines to ensure that the real price of cigarettes increases at a rate faster than the average growth of per capita income.

Key Features and Tax Revisions

1. Revised Excise Duty Rates

The Act introduces sharp increases in excise duties across various categories:

• Smoking Mixtures (Pipes/Cigarettes): Increased from 60% to 325%.
• Chewing Tobacco: Increased from 25% to 100%.
• Unmanufactured Tobacco: Increased from 64% to 70%.
• Hookah/Gudaku Tobacco: Increased from 25% to 40%.
• Cigarettes: Specific duties revised from a range of ₹200–₹735 to ₹2,700–₹11,000 per thousand sticks.

2. GST Restructuring

• Beedis: Now categorized under 18% GST.
• Other Tobacco Products: Moved to the 40% GST bracket.
• Valuation: For products like Gutkha, Khaini, and Jarda, the GST value will now be based on the Retail Sale Price (RSP) declared on the package.

Status of GST Compensation Cess

• Definition: An additional levy introduced in July 2017 to compensate States for revenue losses during the GST transition.
• Extension & Expiry: Originally intended for five years, it was extended to March 31, 2026, primarily to repay the ₹2.7 lakh crore debt incurred by the Centre during the COVID-19 pandemic.
• Phase-out: The cess will be completely phased out for tobacco products starting February 1, 2026, necessitating the compensatory rise in excise duties.

Significance

1. Revenue Neutrality: Prevents a sudden dip in government revenue that would have occurred due to the cessation of the compensation cess.
2. Health Governance: By significantly raising the cost of smoking and chewing tobacco, the Act acts as a deterrent to consumption, particularly among youth and low-income groups.
3. Simplified Valuation: The shift to RSP-based valuation for smokeless tobacco reduces tax evasion and simplifies the audit process for tax authorities.

Conclusion

The Central Excise (Amendment) Act, 2025 represents a sophisticated balancing act between fiscal responsibility and public health. By proactively adjusting excise rates before the expiration of the GST compensation cess, the government ensures that tobacco remains a high-tax commodity, supporting long-term health goals while securing national revenue.