Excise collected from tobacco to be shared with states, no extra tax incidence: FM Nirmala Sitharaman

New Delhi: Finance Minister Nirmala Sitharaman on Wednesday said tax revenues collected from excise duty on tobacco and related products will be part of the divisible pool, and 41 per cent of that will be shared with the states.

Replying to the debate on the Central Excise (Amendment) Bill in Lok Sabha, Sitharaman said this is not an additional tax, and the same tax burden, as currently applicable under the GST regime, will continue. The bill seeks to levy excise duty on tobacco, related products.

"This is not an additional tax. This is not something which the Centre is taking away. This is not a cess. This is excise duty. It existed before GST... It is coming back to the Centre, to be collected as excise duty, which will go to the divisible pool. It is going to be redistributed again at the 41 per cent which has to go to the states," Sitharaman said.

Earlier moving the Bill for consideration and passage in Lok Sabha, Sitharaman said the levy of excise on tobacco will ensure that the tax incidence on the demerit good remains the same even after the expiry of the GST compensation cess.

Sitharaman said since the GST law caps maximum rate of tax at 40 per cent, the ultimate tax incidence on tobacco after removal of GST cess would come down from the current level if excise duty is not levied.

"In order to ensure that the incidence is not lower than what it was during GST with the compensation cess, we are bringing this excise. In a way, we are saying cigarettes should not become affordable now because incidence has become less," the minister said.

The bill will replace the GST compensation cess, which is currently levied on all tobacco products like cigarettes, chewing tobacco, cigars, hookah, zarda, and scented tobacco. Currently, a 28 per cent GST plus cess at a varied rate is levied on tobacco.

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, not having filters, and of length not over 65 millimetres, will attract duty of Rs 2,700 per 1,000 sticks and Rs 4,500 per 1,000 sticks for length over 65 millimetres but not exceeding 70 millimetres.

Sitharaman further said the bill was necessary as the loan taken to meet the revenue loss of states during Covid will be repaid in a "couple of weeks", post which the compensation cess will cease to exist.

"In another, probably, couple of weeks, the loans will be completely repaid."

The Centre, therefore, wants to make sure that the excise will come back to us so that we can levy the duty," Sitharaman said. At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 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 4 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.

Lok Sabha, later, passed the Central Excise (Amendment) Bill, 2025, by a voice vote.