TaxTMI 
TaxTMI 
Breaking News: Tobacco Tax Shock – ITC Tanks 10%, Market Reacts to GST & Excise Overhaul (Full Comprehensive Analysis Inside – Effective Feb 1, 2026)
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....reaking News: Tobacco Tax Shock – ITC Tanks 10%, Market Reacts to GST & Excise Overhaul (Full Comprehensive Analysis Inside – Effective Feb 1, 2026)<br>By: - Shivam Agrawal<br>Goods and Services Tax - GST<br>Dated:- 3-1-2026<br>Market Impact & Effective Date Stocks tumbled after the Finance Ministry notified sweeping changes to GST valuation and Central Excise on tobacco and pan masala. ITC Ltd fell by about 10% intraday, Godfrey Phillips and VST Industries also declined as investors priced in higher tax incidence and compliance costs. The measures take effect from 1 February 2026. Tax Update: GST & Central Excise Overhaul for Tobacco & Pan Masala (Effective 1 February 2026) Scope covered: Bidis/Biris (hand & machine), Cigarettes & C....
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....igars, Chewing tobacco, Jarda scented tobacco, Gutkha, and Pan masala. Executive Snapshot (What Changes & When) * RSP-based GST valuation (new Rule 31D) for specified goods from Feb 1, 2026; formula provided to back out tax from printed RSP; Rule 86B relief for dealers. * GST rate restructuring: Bidis 18% total GST (9%+9%); others incl. pan masala & most tobacco products 40% total GST (20%+20%). * Compensation Cess on tobacco/pan masala set to Nil from Feb 1, 2026. * Central Excise revived and strengthened: machine-capacity-based levy for chewing tobacco, jarda, gutkha; specific excise duty on cigarettes & cigars significantly raised under the Central Excise (Amendment) Act, 2025 and revised tariff notifications (e.g., Notification....
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.... 04/2025-CE(Tariff)), which abolish earlier concessional rates and introduce higher slabs effective 1 Feb 2026. * Health and National Security Cess Bill: proposes an additional cess on pan masala and certain tobacco products to fund health initiatives and national security programs. Details are awaited, but businesses should monitor developments closely as it may introduce stricter packaging norms and higher penalties for non-compliance. 1) GST: New Rates & Valuation (with Official Notifications) A. Rule 31D - RSP/MRP-based valuation Inserted by the CGST (Fifth Amendment) Rules, 2025 via Notification No. 20/2025-Central Tax (G.S.R. 950(E)), with effect from 1 Feb 2026. Rule 31D applies to pan masala, unmanufactured tobacco (excluding l....
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....eaves), cigarettes, other manufactured tobacco (excluding bidis), and nicotine inhalation products. Bidis are excluded and continue under transaction value. (Ref.: Notification 20/2025-Central Tax) Context - Section 15(5) of the CGST Act: empowers the Government to prescribe special valuation methods for specified supplies; Notification 49/2023-Central Tax earlier operationalized RSP-based valuation for pan masala and tobacco, now formalized through Rule 31D. RSP (Retail Sale Price) - Quick Definition * RSP = maximum price printed on the package, inclusive of all taxes, duties, surcharges, and cesses; * If multiple RSPs are declared, use the highest; * Area-wise declared prices apply within that area; * Any increase in RSP at any ....
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....stage (pre/during/post supply) is recognized for valuation. Is RSP Equal to MRP? * Yes. Under GST and Rule 31D, RSP and MRP are effectively the same: * Both represent the maximum retail price printed on the package, inclusive of all taxes. * For valuation purposes, RSP = MRP. GST Calculation Formula under Rule 31D For goods covered under Rule 31D: Taxable Value = Declared RSP / (100 + GST Rate) x 100 GST Amount = Taxable Value x GST Rate / 100 Example: If RSP = Rs.100 and GST Rate = 28% Taxable Value = 100 / 128 x 100 = Rs.78.13 GST = Rs.78.13 x 28 / 100 = Rs.21.87 Impact on Supply Chain - Is It Like VAT?&nbs....
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....p; * No, it is not like a traditional Value Added Tax (VAT): * Under VAT/GST transaction value method, tax is levied on incremental value addition at each stage. * Under Rule 31D, tax is computed on the full RSP at every point in the supply chain, regardless of actual transaction price. * However, input tax credit (ITC) is available at each stage, so the tax burden is offset. * Net effect: No cascading tax; final tax incidence remains on the consumer, but valuation is based on RSP, not actual value addition. Comparison: RSP/MRP Method vs Transaction Value Basis Transaction Value Method RSP/MRP Method (Rule 31D) Valuation Basis Pri....
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....ce actually paid Printed RSP (inclusive of taxes) Flexibility Reflects discounts Ignores discounts; uses highest RSP Tax Nature True VAT (value addition) Not VAT-like; same tax base at each stage Compliance Complexity Lower Higher (requires accurate labeling and updates) RSP Checklist * Labeling: Ensure correct RSP/MRP printed on all packages. * Multiple RSPs: Highest RSP must be considered for GST valuation. * Price Revisions: Any increase in RSP must be accounted for in valuation. * Invoicing: Taxable value must be computed using Rule 31D formula. * Returns & Reporting: Align GST retur....
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....ns with RSP-based valuation. B. Rate restructuring - Notification 19/2025-Central Tax (Rate) From Feb 1, 2026: * Biris (HS 2403 19 21 / 2403 19 29) in Schedule II: 9% CGST (18% total GST). (Ref.: Notification 19/2025-CT(R)) * Pan masala (2106 90 20); unmanufactured tobacco (2401); cigarettes, cigars, cheroots, cigarillos (2402); other manufactured tobacco/substitutes (2403, excl. biris); products intended for inhalation without combustion (2404 11 00 & 2404 19 00) in higher slab: 20% CGST (40% total GST). (Ref.: Notification 19/2025-CT(R)) C. Compensation Cess withdrawn Notification No. 01/2025-Compensation Cess (Rate) prescribes Nil cess on listed goods from 1 Feb 2026. 2) Central Excise: New Framework & Product-wise Positio....
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....n A. Commencement Notification No. 03/2025-Central Excise (N.T.) appoints 1 Feb 2026 as the date on which the Central Excise (Amendment) Act, 2025 comes into force. B. Section 3A - Machine-based levy for pouches Notification No. 04/2025-Central Excise (N.T.) notifies chewing tobacco (incl. filter khaini), jarda scented tobacco, and gutkha-when manufactured with the aid of packing machines and packed in pouches-as goods covered under Section 3A. C. Capacity Determination & Collection Rules, 2026 Notification No. 05/2025-Central Excise (N.T.) issues the Chewing Tobacco, Jarda Scented Tobacco & Gutkha Packing Machines (Capacity Determination & Collection of Duty) Rules, 2026. D. Monthly duty rates (machine levy) Notification No. 04/202....
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....5-Central Excise (Tariff) prescribes slab-wise monthly duty based on machine speed (pouches per minute) and pouch RSP. E. Cigarettes & cigars - Specific excise duty Post-amendment, specific excise is raised materially, with published ranges Rs, 2,050-Rs. 8,500 per 1,000 sticks depending on length/type. F. Bidis (biris) Bidis are not covered by the machine levy under Section 3A; GST shifts to 18% total under 19/2025, valuation remains transaction value, and nominal basic excise on manufacturing continues. 3) GST & Valuation Matrix (from 1 Feb 2026) Category HSN Total GST Valuation Basis Legal Reference Bidis or Biris (hand & machine) 2403 19 21 / 2403 19 29 18% Transaction value Notif. 19/2025-CT(R) Pan masala 2106 90 2....
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....0 40% RSP (Rule 31D) Notif. 19/2025-CT(R); 20/2025-CT Unmanufactured tobacco 2401 40% RSP (Rule 31D) Notif. 19/2025-CT(R); 20/2025-CT Cigarettes & cigars 2402 40% RSP (Rule 31D) Notif. 19/2025-CT(R); 20/2025-CT Other manufactured tobacco (excl. bidis) 2403 40% RSP (Rule 31D) Notif. 19/2025-CT(R); 20/2025-CT Nicotine inhalation products 2404 40% RSP (Rule 31D) Notif. 19/2025-CT(R); 20/2025-CT Compensation Cess: Nil from 1 Feb 2026 (Notif. 01/2025-CESS(R)). 4) Comparison - Existing vs New (with Notification References) A) Bidis / Biris Aspect Existing New Reference GST 28% total 18% total Notif. 19/2025-CT(R) Valuation Transaction value Transaction value Rule 31D not applicable Excise Rs, 0.05/1,000 (ha....
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....nd); Rs.0.10/1,000 (machine) Unchanged Notif. 03/2019-CE Comp. Cess Not applied historically Nil Notif. 01/2025-CESS(R) B) Cigarettes & Cigars Aspect Existing New Reference GST 28% + Cess 40% total GST; Cess Nil Notif. 19/2025-CT(R); 01/2025-CESS(R) Valuation Transaction value RSP (Rule 31D) Notif. 20/2025-CT Excise Nominal Rs. 2,050- Rs. 8,500/1,000 sticks Notif. 04/2025-CE(Tariff) C) Chewing Tobacco, Jarda, Gutkha Aspect Existing New Reference GST 28% + Cess 40% total; Cess Nil Notif. 19/2025-CT(R); 01/2025-CESS(R) Valuation Transaction value RSP (Rule 31D) Notif. 20/2025-CT Excise Low ad valorem Machine-based levy Notif. 04/2025-CE(N.T.); 05/2025-CE(N.T.) D) Pan Masala Aspect Existing New....
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.... Reference GST 28% + Cess 40% total; Cess Nil Notif. 19/2025-CT(R); 01/2025-CESS(R) Valuation Transaction value RSP (Rule 31D) Notif. 20/2025-CT Note: Pan masala does not attract excise duty under tobacco excise provisions. It remains under GST with RSP-based valuation and 40% GST, plus any applicable Health & National Security Cess under separate legislation. 5) Compliance Checklist (From 1 Feb 2026) * Update GST masters: set Bidis to 18%, others (incl. pan masala) to 40%, and Compensation Cess to Nil. * Switch valuation to RSP for HSNs covered by Rule 31D; apply the tax-extraction formula. * Excise registration & declarations (pouched chewing tobacco/jarda/gutkha): file Form CE DEC-01 by 7 Feb 2026; certify machine speed;....
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.... install CCTV per Rules, 2026. * Invoice & ERP changes: show GST on RSP and excise duty (where applicable) separately; align pricing for cigarette duty bands. * Contracts & pricing: reflect higher excise (cigarettes/cigars) and machine levy (pouched smokeless tobacco) to avoid margin shocks. * Charge amended higher excise rates as applicable for cigarettes & cigars and complete excise return filing and tax payment compliances. 6) Notification Quick List * 19/2025-CT(R) - GST rate restructuring. * 20/2025-CT - CGST (Fifth Amendment) Rules (Rule 31D). * 01/2025-CESS(R) - Compensation Cess Nil. * 03/2025-CE(N.T.) - Excise Act 2025 commencement. * 04/2025-CE(N.T.) - Section 3A notified goods. * 05/2025-CE(N.T.) - Capacity Rul....
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....es. * 04/2025-CE(Tariff) - Machine levy slabs. * 03/2019-CE - Legacy excise on bidis. Disclaimer * This article is for general guidance only. Refer to official Gazette notifications for legal compliance. <br> Scholarly articles for knowledge sharing by authors, experts, professionals ....