The Central Excise (Amendment) Bill, 2025, received Parliament’s approval on Thursday after being passed by the Rajya Sabha. The legislation, which the Lok Sabha had cleared on Wednesday, replaces the existing GST compensation cess on tobacco products with increased central excise duties.
Introduced on December 1, the bill amends the Central Excise Act, 1944. Its primary goal is to adjust the tax structure on tobacco, discontinuing the compensation cess once all liabilities are settled and providing fiscal space for a duty hike. This move maintains the “sin tax” incidence on tobacco while modernizing India’s indirect tax framework.
Since the rollout of GST in 2017, tobacco has remained subject to a unique three-part tax structure: GST, a compensation cess (designed to offset revenue losses for states), and central excise duty.
Finance Minister Nirmala Sitharaman stated that the bill ensures the overall tax burden remains stable post-cess phaseout by allowing the central excise duty to be raised. She clarified that the government’s intention to maintain a high tobacco tax would not negatively impact farmers.
Sitharaman informed Parliament that the government is actively encouraging tobacco farmers to diversify through existing programs. The Crop Diversification Programme (CDP), running since 2015-16 under the Rashtriya Krishi Vikas Yojana (RKVY), is already in place across 10 tobacco-growing states to help farmers transition to alternative crops like pulses, oilseeds, and horticultural products.
The legislation enforces significant tax increases across various tobacco categories:
Unmanufactured Tobacco: Duty rises from 64% to 70%.
Cigarettes: Duty surges dramatically from the existing Rs 200–735 per thousand to between Rs 2,700 and Rs 11,000 per thousand.
Chewing Tobacco: Duty quadruples to 100%.
Hookah/Gudaku Tobacco: Increases to 40%.
Smoking Mixtures: Sees a jump to 325%.
This legislation is seen as a crucial step towards discouraging tobacco consumption through higher taxes while safeguarding state revenues and pushing forward the government’s efforts to reform the indirect tax structure.