Lok Sabha Passes Central Excise (Amendment) Bill, 2025: A Detailed Analysis of Tobacco Tax Hike and Compliance Impact

Published on December 4, 2025 | By Kyna FinTax Associates

In a landmark decision aimed at sustaining government revenue and promoting public health, the Lok Sabha recently passed the Central Excise (Amendment) Bill, 2025, signaling a major overhaul in taxation on tobacco products in India. This amendment introduces steep hikes in excise duties on cigarettes, chewing tobacco, unmanufactured tobacco, cigars, hookah tobacco, and other tobacco-related products, while simultaneously ending the GST compensation cess currently levied on these products.

This article delves deeply into the key provisions of the bill, compares the new duty structure with the previous one, explains why this legislative shift is necessary, and explores its implications for tobacco businesses, retailers, and compliance professionals nationwide.

Why This Amendment Matters: Background and Context

The GST regime introduced a compensation cess on tobacco products to compensate states for potential revenue loss due to GST rollout. This cess was a significant portion of the tax burden on tobacco, apart from the base GST rate applied on tobacco goods.

However, the GST compensation cess is scheduled to end in March 2026. This termination comes after the government repays an outstanding ₹2.69 lakh crore corpus of COVID-19 related loans. With the cessation of the compensation cess, there is a risk that tobacco products would become cheaper, undermining public health objectives and reducing government revenues from these ‘sin goods’.

To prevent such an outcome, the Central Excise (Amendment) Bill, 2025, was introduced to phase out the compensation cess and replace it with increased central excise duties on tobacco products. This measure is designed both to sustain high tax incidence and serve as a deterrent against tobacco consumption.

The Finance Minister, Nirmala Sitharaman, emphasized:

“Cigarettes must not become affordable.“

This bill aligns with the government’s ongoing health agenda and commitment to curb tobacco use.

Key Provisions of the Central Excise (Amendment) Bill, 2025

The bill primarily amends the Central Excise Act, 1944, and includes the following major components:

• Abolition of GST Compensation Cess: The cess on tobacco products, which compensates states as part of GST compensation, will end March 31, 2026, coinciding with the repayment of COVID-19 borrowings.

• Introduction of Revised Central Excise Duties: Excise duties on tobacco products will be significantly increased to maintain the overall tax burden after cess removal.

• Revenue Sharing with States: 41% of the revenue collected from these enhanced excise duties will be devolved to states, preserving fiscal federalism.

• Continued Applicability of GST: GST rates remain applicable on tobacco products alongside the new, higher excise duties, meaning consumers pay a combined higher tax.

New Excise Duty Rates vs Old Rates: A Comparative Table

The new rates indicate a sharp increase in the central excise duty burden across all tobacco categories, reflecting the government’s resolve to keep tobacco products expensive and discourage their consumption.

Implications for Tobacco Businesses

The amendment bill imposes multiple implications for tobacco manufacturers, distributors, wholesalers, and retailers:

1. Pricing Strategy Overhaul

Businesses must reassess existing pricing structures to incorporate the markedly higher excise duties without significantly eroding profit margins. This could lead to higher retail prices and potentially reduced consumption volumes.

2. Compliance Complexity

With the coexistence of GST and increased excise duties, companies must familiarize themselves with dual tax filings and maintain clear, updated records to avoid discrepancies. Misreporting excise duty can attract severe penalties.

3. Working Capital Challenges

The upfront payment of increased excise duty could strain liquidity, especially for small and medium-sized manufacturers reliant on thin working capital buffers.

4. Supply Chain Adjustments

Revised agreements with distributors and retailers will be necessary to reflect the new tax burdens and pricing policies.

5. Litigation Risk Mitigation

Proper documentation and accurate payment of duties will be essential to avoid costly disputes with tax authorities.

What Businesses Should Do Now: Expert Compliance Tips

To adapt swiftly, businesses should:

• Update ERP Systems: Incorporate new excise duty rates and GST compliance norms to automate correct tax calculations.

• Conduct Pricing Reviews: Develop pricing strategies to pass the new tax costs efficiently.

• Train Finance Teams: Ensure that tax and accounts departments are briefed about legislative changes and procedural updates.

• Maintain Comprehensive Documentation: Keep clear invoices, delivery challans, and tax returns to substantiate compliance.

• Seek Professional Guidance: Engage with tax experts to avoid pitfalls during the transition period.

How Kyna FinTax Associates Can Support Your Business

Navigating the complexities of the new Central Excise framework requires expert guidance. Kyna FinTax Associates offers specialized services to help your tobacco-related or manufacturing business maintain full compliance with the latest regulations:

• Excise Duty and GST Dual Compliance

• Tax Impact Assessments and Pricing Advisory

• Filing of Excise Returns and Documentation Support

• Consultation on State Revenue Sharing and Incentive Claims

Our team brings experience serving over 100 clients across Delhi, Rajasthan, and pan-India, ensuring your business stays ahead of regulatory changes.

The Central Excise (Amendment) Bill, 2025 is a game changer for tobacco taxation in India, ensuring that the easing of GST compensation cess does not reduce the tax incidence on tobacco products. Businesses in the tobacco supply chain must act promptly to realign their compliance, pricing, and operational strategies in light of these sweeping changes.

Kyna FinTax Associates remains committed to guiding you through this transition seamlessly, safeguarding your business interests while ensuring regulatory adherence.

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Kyna FinTax Associates
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