The Central Excise (Amendment) Act, 2025: A Step Towards Modernized Excise Administration?

Introduction

The Goods and Services Tax (GST) regime was the biggest change in the indirect tax regime in India since its introduction on 1 July 2017, when various central and state taxes were replaced by a single tax. Tobacco and tobacco products were however subjected to continued central excise duty under the Central Excise Act, 1944, apart from GST and GST Compensation Cess, a levy to compensate States for the revenue loss due to the transition of the tax regime from central excise duty to GST.

The Union Government took steps to safeguard the revenue from tobacco from a sudden drop as the Compensation Cess was winding down in early 2026. The Union Finance Minister, Smt. Nirmala Sitharaman presented and moved the Central Excise (Amendment) Bill, 2025. It was passed by both Houses of Parliament in December 2025 and received Presidential assent on 11 December 2025 as the Central Excise (Amendment) Act, 2025. The Act substantially changed the rates of excise duty on tobacco products in the Fourth Schedule of the 1944 Act, which came into force from 1st February 2026.

The focus of this article is on the legislative history of the Act, its major features, the parliamentary debate on it, and its consequences.

Background

The need for the Amendment goes back to the 56th meeting of the GST Council headed by Finance Minister Nirmala Sitharaman, which had recommended a detailed rationalization of the GST rates. Most of the goods and services were brought under a simplified two-slab tax structure of 5 per cent and 18 per cent with a residual rate of 40 per cent for some demerit items.

The Council, however, discarded cigarettes, unmanufactured tobacco, beedi and chewing tobacco products including zarda from this immediate transition and the revised rates were to be notified at a later date, while the existing rates of GST and Compensation Cess were to be continued till the loan and interest obligations under the compensation cess account were fully settled. The Council also proposed that the valuation of pan masala, gutkha, cigarettes, unmanufactured tobacco and chewing tobacco like zarda on the GST should be done on the Retail Sale Price instead of transaction value.

After the compensation cess liability it was settled, the Government announced 1^st of February 2026 as the date from which additional excise duty will be levied on tobacco products and a new cess on pan masala, while the tobacco products will attract a 40% GST rate under the Goods and Services Tax (GST) regime and the Central Excise (Amendment) Act, 2025 will be implemented simultaneously, thereby ensuring that the tax incidence on these products does not shift.

The Revised Duty Structure

The amendment alters the excise duty rates given under the 4^th schedule of the Central Excise Act, 1944, rising central excise duty of unmanufactured tobacco, tobacco products, manufactured tobacco and tobacco substitutes. The recorder revision of the bill in the Parliament includes:

1. Previous specific duty for cigarettes ranged between Rs 200 and Rs 735 per thousand sticks which has been now increased to a range of Rs 2,700 to 11,000 per thousand sticks.
2. The bill prescribed an increase on chewing tobacco from 25% to 100%.
3. Duty on hookah or gudaku tobacco will increase from 25% to 40% per cent.
4. For smoking mixtures for pipes and cigarettes, it has been proposed to increase the duty from 60% to 325%.
5. Duty on unmanufactured tobacco (including sun-cured tobacco leaves) has been increased from 64% to 70%.

To implement the revised duty structure for packed tobacco products, the Central Government informed the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026, along with corelated Central excise notifications on 31^st of December 2025.

These changes in rules, effective from the 1^st of February 2026 instituted a capacity-based levy on chewing tobacco (including khaini), gutkha and jarda scented tobacco. Under the ambit of Section 3A of the Central Excise Act, 1944, the manufacturers are mandated to submit excise duty based on the annual production capacity of their packing machines instead of the actual production. The production capacity is ascertained be various factors such as the maximum speed of each packing machine and the stated Retail Sale Price of the packets.

Until the manufacture’s declaration is verified by the authorities, the duty is paid on a provisional basis. After the completion of verification, the jurisdictional Deputy Commissioner or Assistant commissioner of Central Excise mandatorily issue a final order within 30 days, after providing the manufacturer an opportunity to be heard. As per the objective of modernizing excise administration, the associated rules also mandate installation of CCTV cameras at the packing machine premises along with a mandate of minimum footage retention period. It aimed at strengthening the concurrent and current verification by curbing under reporting of production capacity.

The Health Security se National Security Cess Act, 2025

In addition to the Central Excise (Amendment) Bill, Parliament also contemplated the Health Security se National Security Cess Bill, 2025. The resulting Act establishes a legal mechanism to impose a special cess on the machinery installed or the manufacturing processes used to produce specified goods. It initially applies to pan masala, but the Government may impose cess to other goods by further notification. The proceeds are credited to the Consolidated Fund of India and may be used for expenditure on national security and public health. 

A similar revenue protection rationale has been extended to pan masala manufacturers by the Health Security se National Security Cess Act, 2025 which came into force from 1st of February 2026 along with the Central Excise (Amendment) Act.

Rationale Behind the Amendment

The Finance Minister, while elucidating the purpose of the amendment in the Lok Sabha, stated that the Bill was not a new law or an additional tax. It restored the excise duty which was already existing before the institution of the GST regime, and the compensation cess rates have not been changed since July 2017. 

In response to the debate in Rajya Sabha, she also clarified that the higher duty on cigarettes would be shared with the States in accordance with the recommendations of the Finance Commission, and that the levy was an excise duty, not a cess. 

Addressing the public-health aspect, Dr. D. Purandeswari, who initiated the Lok Sabha debate, pointed out that tobacco-related diseases are responsible for an estimated 1.35 million deaths every year in India through cancer, cardiovascular and lung diseases. She said that the Bill was aimed at ensuring price stability and to function as a deterrent, especially for the vulnerable sections of society and the younger generation. 

Opposition members raised several concerns in the discussion. Shri Karti P. Chidambaram pointed out the overall economic loss caused by tobacco consumption and cautioned that the increase in prices might not reduce consumption, if people might switch to cheaper alternatives. Further, Shri Pramod Tiwari in the Rajya Sabha, highlighted concerns about the effect on the tobacco growers and proposed to refer the Bill to a Parliamentary Committee.

Implications

The amendment requires recalibration of compliance systems for manufacturers and traders of tobacco products, especially those dealing in packed chewing tobacco, jarda and gutkha. These products are now subject to the capacity-based levy administered through Central Excise field formations. 

It is expected that businesses will pass on at least part of the increased duty burden to consumers, which will translate to an increase in the retail price of cigarettes, chewing tobacco and hookah products from 1 February 2026 onwards.

From a fiscal federalism perspective, the Finance Minister’s justification that the proceeds of the excise duty will be shared with the States as per Finance Commission recommendations is important, because the earlier Compensation Cess was not shareable in the same way. 

From a public-health standpoint, the rise in duty is consistent with the objective expressed in the debates, of reducing tobacco use and safeguarding vulnerable groups and youth. The concerns raised in Parliament about tobacco growers and possible changes in smoking habits suggest that practical impact will need to be monitored on a regular basis.

Conclusion

The Central Excise (Amendment) Act, 2025 is a measured legislative response designed to ensure that the overall tax burden on tobacco products remains unchanged after the withdrawal of the GST Compensation Cess. 

The Central Government has emphasized that the changes replace the discontinued cess rather than impose an additional tax. During the parliamentary debates, members raised concerns regarding the possible effects on tobacco consumption and on the livelihood of tobacco farmers. To conclude, the amendment highlights the central government’s attempt to balance revenue requirements, public-health objectives and the interests of the States as India’s GST framework continues to evolve. For more insights on taxation and legal developments, visit J.P. Associates.

Author Details: Vaishnavi Sarraff, 5th Year Law Student, Symbiosis Law School, Nagpur

References

1. The Central Excise (Amendment) Act, 2025 (Act No. 34 of 2025). 
2. PRS Legislative Research, The Central Excise (Amendment) Bill, 2025, https://prsindia.org/billtrack/the-central-excise-amendment-bill-2025 
3. The Health Security se National Security Cess Act, 2025 (Act No. 35 of 2025).
4. Notification No. 05/2025-Central Excise (N.T.) dated 31 December 2025 – Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026, see also, https://www.taxheal.com/wp-content/uploads/2026/01/Central-Excise-Notifications-regarding-Tobacco.pdf)
5. Notification appointing 1 February 2026 as the date of commencement of the Central Excise (Amendment) Act, 2025 (G.S.R. 951(E)).