Context
The Union Finance Ministry has notified a comprehensive restructuring of the tobacco taxation regime effective February 1, 2026, following the passage of the Central Excise (Amendment) Act, 2025. This marks a shift from general revenue compensation to a dedicated health-cum-security fiscal framework.
1. Structural Changes in Levies
I. Phase-out of GST Compensation Cess
- The GST compensation cess on tobacco products has officially ended, as the original objective of bridging state revenue gaps has been fulfilled.
- This temporary instrument is replaced by a permanent levy under the Health Security-cum-National Security Act, 2025.
- The new cess creates a non-lapsable revenue stream specifically for long-term security preparedness and health capacity building.
II. Revised GST Slabs and Divergent Rates
- Standard Tobacco Products: Cigarettes and chewing tobacco have been moved to the 40% GST slab to reduce affordability.
- Beedi Taxation: Beedis are categorized in a significantly lower 18% GST slab.
- Demerit Goods: All tobacco products remain classified as “demerit goods,” justifying higher tax brackets compared to essential items.
III. Retail Sale Price (RSP) Valuation Mechanism
- For smokeless tobacco (gutkha, khaini, jarda), GST is now calculated based on the Retail Sale Price (RSP) declared on the packaging.
- This mechanism aims to curb under-reporting and tax evasion prevalent in the unorganized tobacco sector.
2. Socio-Economic and Health Facts
I. Consumption Patterns and Demographics
- Rural Prevalence: Beedi smoking is twice as prevalent in rural areas (8.3%) compared to urban centers (4.5%) among men.
- Wealth Correlation: Beedi use is inversely proportional to wealth; consumption is highest among the poorest 20% of the population.
- Intensity of Use: Over 80% of beedi smokers consume more than five sticks daily, surpassing the frequency observed among cigarette users.
II. Comparative Health Risks
- Respiratory Impact: Beedi smokers are 2.87 times more likely to suffer from asthma, compared to 1.82 times for cigarette smokers.
- Mortality Risks: Beedi consumption is associated with a 2.6 times higher risk of tuberculosis mortality.
- Cancer Profile: Beedi smoking is linked to elevated risks for lung and laryngeal cancers, often exceeding the risks associated with cigarettes.
With respect to the tobacco taxation changes effective from February 2026, consider the following statements:
I. The GST compensation cess has been replaced by a purpose-specific levy under the Health Security-cum-National Security Act, 2025.
II. All tobacco products, including beedis, are now strictly taxed at a uniform GST slab of 40%.
III. Retail Sale Price (RSP) based valuation has been introduced for smokeless tobacco to address tax evasion.
IV. Beedi smokers in India exhibit a higher daily frequency of consumption compared to cigarette smokers.
Which of the statements given above are correct?
(a) I, II, and III only
(b) II, III, and IV only
(c) I, III, and IV only
(d) I, II, III, and IV
Answer : C
Explanation:
● Statement I is correct: The compensation cess was phased out in favor of the new health and security levy.
● Statement II is incorrect: There is a divergence in rates; beedis are taxed at 18% while other products are at 40%.
● Statement III is correct: RSP-based valuation is the new mechanism for smokeless tobacco products.
● Statement IV is correct: Data indicates over 80% of beedi smokers use more than five sticks daily, a higher proportion than cigarette smokers.
