TaxTMI 
TaxTMI 
TaxTMI 
Effective 1st February, 2026, the taxation regime for Tobacco and Pan Masala will substantially change. The Government has made slew of amendments to the GST and Central Excise Law. Further, Compensation Cess has been done away with and a new cess namely Health Security Se National Security Cess (‘HSNS Cess’) has been introduced for Pan Masala and Central Excise Duty has been increased for tobacco products. No change has been made to National Contingent Calamity Duty (‘NCCD’) and it will continue to be levied on tobacco as it is. Going forward, the following taxes will be leviable:
- Tobacco – GST + Central Excise Duty + NCCD
- Pan Masala – GST + HSNS Cess
The salient features of the new taxation regime are discussed as under:
GST
- Pan Masala, Tobacco and cigarettes (other than biris) have been placed under Schedule III taxable at 40% rate [1] and notified as goods which are taxable on Retail Sale Price (RSP) basis [2], if sold in packaged form by declaring RSP.
- Rule 31D has been inserted in the CGST Rules for calculation of tax amount as under – Tax amount = (Retail sale price X 40) / (100+ 40).
- No compensation cess will be leviable on any goods or service effective 1st February 2026.
- Thus, for a Re. 1 pouch, the GST component will come around 28.57% of RSP.
- The requirement for disclosure of details of machines and filling of monthly details of inputs, production and electricity consumption in accordance with Notification No. 4/2024-Central Tax dated 5.1.2024 continues.
NCCD
- NCCD will continue to be levied on cigarettes and Tobacco.
- The rate of Duty on tobacco products will be 25% [3] on RSP after applying abatement of 55% [4].
- Thus, for a Rs. 1 pouch, NCCD Component will come around 11.25%.
Central Excise
- Excise Duty on tobacco products is substantially increased. For instance, Chewing Tobacco and Jarda Scented Tobacco will be taxable at the rate of 82% and Gutkha will be taxable at 91% as opposed to earlier rate of 0.50%. Abatement of 55% of RSP will continue.
- Chewing tobacco, Jarda Scented Tobacco and Gutkha manufacture with aid of packing machines and packed in POUCHES are notified [5] under Section 3A of the Central Excise Act to be taxed on the basis of capacity of machines installed. [Chewing tobacco, Jarda Scented Tobacco and Gutkha packed in container or tin will continue to be taxed on the basis of RSP and not on the basis of capacity of machines installed.]
- Rate of duty has been prescribed based on number of machines installed, rated speed of the machines and RSP of pouches manufactured. [6] Actual quantity manufactured is not relevant.
- Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026 have been notified [7]. The salient features of the rules are as under:
- A declaration in FORM CE DEC-01 is to be filed before 7th February 2026 [Rule 6(1)]
- A Chartered Engineer’s Certificate in Form CE CCE-01 is required [Rule 6(2)].
- Jurisdictional Deputy/ Assistant Commissioner of Central Excise will conduct a physical verification and determine the capacity of capacity of machines [Rule 7 and 8].
- Duty will be payable in advance for the entire month as per rates notified [8] [Rule 9] by 6th day of the same month [Rule 13(1)] and a statement shall be filed in FORM CE PMT-01 by 10th of the same month [Rule 13(2)]. A monthly return as per Rule 12 of Central Excise Rules, 2017 shall also be filed.
- In case of new manufacturer, duty will be calculated pro-rata for number of days commencing from date of installation. In case of addition, installation, removal or uninstallation of machines in the factory during the month, the duty will be calculated on the basis of maximum number of machines installed on any day during the month [Rule 9].
- Abatement will only be allowed if the machines are not operated for a continuous period of 15 days or more subject to the condition that Jurisdictional officer has been informed three days in advance, the machines are sealed and no manufacturing activity is undertaken on the said machines. Abatement claim will be verified and will be available for adjustment for duty liability of the month following the month in which the verification order is passed [Rule 10].
- CCTV surveillance system shall be installed covering all areas where packing machines are installed and the recorded footage shall be preserved for a minimum period of 48 months [Rule 16].
- Cenvat Credit of bulk packs of notified goods as is available on the last day of the preceding month shall be available for utilization of duty payment [Rule 20].
- If it is found that goods are manufactured or cleared from a unit which is not registered registration, duty liability will be determined on the basis of number of machines found for the period from 1st February 2026 or the last five years, whichever is later (unless contrary is proved to the satisfaction of proper officer) [Rule 22].
HSNS Cess
- The Government has notified the Health Security Se National Security Cess Act, 2025 and it will come into effect on 1st February 2026.[9] Further. Health Security Se National Security Cess Rule, 2026 have also been notified [10].
- Currently, HSNS cess applies to Pan Masala [Tarriff Item 2106 90 20] packed in POUCHES, TINS or CONTAINERS. It can be extended to any goods as may be notified.
- Taxable Person - Person liable to pay HSNS Cess is the person who owns, possesses, operates, manages, or is otherwise in control of machine or undertakes any process by which spefied goods are manufactured or produced [Section 3].
- Computation of Cess –
- HSNS Cess will be payable based on the the weight of the pouches, tins or container and the rated speed of machines installed in a factory. HSNS Cess shall be computed separately for each factory [Section 5].
- Rates of duty are specified in Schedule II, Table I for machine-based process and Table II for wholly manual process.
- Maximum rated speed of the machine is relevant and actual operating speed is not relevant. If machines is used to manufacture goods or different weight during a month, cess will be calculated with reference to maximum weight of pouch/tin/container. In case of addition, installation, removal or uninstallation of machines, cess will be payable based on maximum number of machines installed on any day during the month [Rule 12].
- Abatement may be claimed if the machines are not operated for a continuous period of 15 days or more subject to the condition that Jurisdictional officer has been informed three days in advance, the machines are sealed and no manufacturing activity is undertaken on the said machines. Abatement claim will be verified and will be available for adjustment for duty liability of the month following the month in which the verification order is passed [Rule 15].
- Registration and Self-Declaration –
- Every taxable person liable for registration shall apply on cbic.gst,gov.in by filling FORM HSNS REG-01 [Rule 4]. Registration will be approved within 7 working days in FORM HSNS REG-02. If registration is not approved within 7 working days, it will be deemed to be approved [Rule 5].
- A self-declaration in FORM HSNS DEC-01 is to be filed within 7 days of grant of registration providing the details with respect to machines installed in the factory [Rule 9]. The details will be verified by the jurisdictional officer within 90 days and thereafter order will be issued within next 15 days.
- CCTV surveillance system shall be installed covering all areas where packing machines are installed and the recorded footage shall be preserved for a minimum period of 48 months [Rule 33].
- Payment and Returns –
- HSNS Cess shall be paid in advance by 7th of the same month electronically in FORM HSNS PMT-01 [Section 10 and Rule 13].
- A monthly return shall be furnished in FORM HSNS RET-01 on or before 20th of succeeding month [Rule 14]. Rectification is permissible till end of the calendar month in which the original return is filed.
- Records shall be kept with respect to invoices of machines installed, electricity bills, receipt and consumption of raw material, record of daily production, clearance and closing stock and generation of waste and disposal of waste and scrap [Rule 19].
- Show Cause Notice, interest and penalty –
- Notice may be issued for non-payment or short-payment within 24 months from the due date of furnishing of return. [Section 16]
- Penalty will be imposable at the rate of 10% in case where non-payment of short payment is for any reason other than fraud, wilful misstatement or suppression of facts to evade tax and 100% in case where non-payment of short payment is for any reason of fraud, wilful misstatement or suppression of facts to evade tax.
- Interest will be levied for delayed payment at the rate of 15% [Section 17].
- Order shall be passed within 12 months from date of issuance of notice, extendable for a further period of 6 months.
- If any machine is found installed in the premises without registration, cess liability will be determined on the basis of number of machines found for the period from 1st February 2026 or the last two years, whichever is later (unless contrary is proved to the satisfaction of proper officer) [Rule 32].
[1]Notification No. 19/2025- Central Tax (Rate) dated 31.12.2025
[2]Notification No. 19/2025- Central Tax dated 31.12.2025
[3]Fifth Schedule of Finance Act, 2020
[4]Notification No.01/2022-Central Excise (N.T.) dated 1.2.2022 -For chewing tobacco, preparations containing tobacco, Jarda scented tobacco and Gutkha
[5]Notification No. 4/2025-Central Excise (N.T.) dated 31.12.2025
[6]Notification No. 4/2025-Central Excise dated 31.12.2025
[7]Notification No. 5/2025-Central Excise (N.T.) dated 31.12.2025
[8]Notification No. 4/2025-Central Excise dated 31.12.2025