The era of “28% GST + Compensation Cess” for the tobacco industry is officially coming to an end. Starting 1st February 2026, the Government is moving to a simplified but higher tax slab and a completely different valuation method to tighten compliance and discourage consumption.

Here is a structured breakdown of the new GST regime for tobacco.

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🕒 The Big Shift: Effective 1st February 2026

The restructuring replaces the previous complex multi-slab system with a unified high-rate GST, while moving away from the “Cess” nomenclature within the GST framework.

The Core Rate Change

• Old Structure: 28% GST + Variable Compensation Cess (based on length, type, etc.).
• New Structure: Flat 40% GST (20% CGST + 20% SGST/UTGST).
• The Cess Factor: The GST Compensation Cess on these items will effectively be withdrawn or reduced to Nil.

Who is Affected?

The 40% GST rate applies to:

• All types of Cigarettes and Cigars.
• Smoking and Chewing Tobacco (including Gutkha).
• Unmanufactured tobacco (excluding raw leaves).
• Pan Masala containing tobacco.

💡 The Bidi Exception: Staying true to its “mass consumption” status, Bidis remain at the 18% GST slab.

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⚖️ The New Valuation Rule: RSP over Transaction Value

Perhaps the most significant change isn’t the rate, but how you calculate it.

• RSP-Based Taxation: GST will now be calculated on the Retail Sale Price (RSP) printed on the package.
• Discounts are Irrelevant: Even if you sell to a distributor at a 20% discount, the GST is payable on the full RSP.
• The Formula: Tax is derived using a “back-calculation” method:

$$\text{Tax Amount} = \frac{\text{Retail Sale Price} \times 40}{100 + 40}$$

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➕ Additional Levies (Outside GST)

The 40% GST is not the end of the story. To ensure the total tax burden doesn’t drop, the Government has introduced/revised other duties:

1. Additional Excise Duty (AED): Applies to cigarettes based on stick length (ranging from ₹2.05 to ₹8.50 per stick).
2. HSNS Cess: A new Health Security cum National Security (HSNS) Cess will apply to Pan Masala and certain tobacco products.
3. Total Incidence: When combined with these extra levies, the total tax on products like Pan Masala can reach as high as 88%.

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🛠️ Action Checklist for Businesses

If you are a manufacturer, importer, or wholesaler, your systems need an immediate overhaul before the February 1st deadline:

• [ ] ERP & Billing Update: Map HSN codes to the new 40% GST rate (or 18% for bidis).
• [ ] Valuation Logic: Configure software to calculate GST based on RSP rather than the net invoice value.
• [ ] Packaging Compliance: Ensure RSP/MRP printing is accurate and updated to reflect the new price points; errors here now carry double the risk (GST + Legal Metrology).
• [ ] Staff Training: Educate accounts and sales teams on why the “Taxable Value” in the invoice might now be higher than the “Sale Value.”
• [ ] GSTN Advisory: Review the latest GSTN Advisory (Jan 23, 2026) regarding reporting RSP-based transactions in GSTR-1 and e-Invoices.

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Bottom Line

The new regime is designed to be “leak-proof.” By tagging the tax to the printed price (RSP), the government is effectively eliminating under-invoicing and discount-based tax arbitrage.