GST 2.0 Update: 40% Cap on Tobacco and Pan Masala, New Central Duty Likely

Text graphic announcing 'Union Budget Expected to Announce New Central Cess' with a megaphone icon.

Policy

The Central Government is considering capping GST on tobacco and pan masala at 40% under the upcoming GST 2.0 rationalisation. To ensure the total indirect tax incidence remains unchanged, the Centre may introduce a new National Calamity Contingent Duty (NCCD) or a special central cess in the Union Budget 2026.

This new levy would operate outside the GST framework, similar to existing NCCD provisions, meaning:

  • It will not require GST Council approval.
  • It will be implemented through an amendment in the Finance Bill 2026.
  • Parliament approval will suffice.

Legal & Fiscal Context

Under Section 9(1) of the CGST Act, the power to levy GST rests with the Centre and States, while Section 11 provides power for exemptions. However, any cess or duty outside the GST law can be introduced under the Finance Act, not under the GST Act. The proposed levy will therefore:

  • Be non-creditable for GST purposes, and
  • Serve as a revenue continuity measure post the phase-out of the GST Compensation Cess regime.

Background: Cess & Compensation

The GST Compensation Cess was introduced to fund the compensation promised to States under the GST (Compensation to States) Act, 2017, and extended beyond June 2022 to repay borrowings of ₹2.7 lakh crore. Once repaid, this cess will sunset, requiring alternate mechanisms for high-yield goods.

Tobacco and pan masala have historically been key revenue contributors:

  • Tobacco: ~53% total tax incidence (28% GST + cess)
  • Pan Masala: ~88% total tax incidence (28% GST + high cess)

Under GST 2.0, the maximum GST slab will be capped at 40% — thus reducing the overall rate unless a compensating levy like NCCD is imposed.

Analysis

The government’s rationale aligns with maintaining revenue neutrality and addressing public health policy concerns by continuing to impose high tax incidence on “sin goods.”

Section 9(1) of the CGST Act authorizes GST levy, but Article 271 of the Constitution allows Parliament to impose additional duties of excise (such as NCCD) for specific purposes. Hence, the new levy will likely take this constitutional route, bypassing GST Council concurrence.

Expected Budget Announcement (FY 2026–27)

  • GST on tobacco products: 40% cap under GST 2.0
  • New central levy: NCCD or Central Cess (approx. 13–15%)
  • Objective: Maintain total effective incidence (~53% on tobacco, ~88% on pan masala)
  • Legal instrument: Finance Bill, 2026 amendment

Key Takeaway

  1. No GST Council approval needed since the levy will be under the Finance Act.
  2. Revenue neutrality ensured by supplementing GST with central duty.
  3. NCCD mechanism revived as a fiscal tool outside GST.
  4. Public health and revenue protection objectives harmonized.

The proposed measure signifies a balancing act — streamlining GST through rationalisation while ensuring the government’s fiscal health remains uncompromised. With GST on sin goods capped at 40%, the new central levy will likely bridge the gap, maintaining the overall burden unchanged.