GST Update: 28% Tax Scrapped on Tobacco & Pan Masala Under New Notifications

GST Notifications Covered

  • Notification No. 19/2025 – Central Tax (Rate)

  • Notification No. 20/2025 – Central Tax

  • Notification No. 19/2025 – Central Tax
    (All applicable from 1 February 2026)

1. Background & Policy Rationale

For many years, products such as tobacco, pan masala and cigarettes were subject to 28% GST along with Compensation Cess, and in some cases additional levies like excise duty or NCCD. This multi-layered tax structure led to valuation disputes, litigation, and frequent cases of undervaluation.

With the compensation cess regime approaching its end, the Government has rolled out a comprehensive GST reset for sin goods. Through a coordinated set of three notifications, changes have been introduced covering:

  • GST rates

  • Valuation mechanism

  • Statutory backing under section 15(5) of the CGST Act

2. Notification No. 19/2025 – Central Tax (Rate)

GST Rate Rationalisation

Key Changes

  • The 28% GST slab is withdrawn for tobacco and pan masala.

  • Biris are specifically taxed at 18% GST.

  • All other tobacco-related products are now subject to 40% GST (20% CGST + 20% SGST), including:

    • Pan masala

    • Unmanufactured tobacco and tobacco refuse

    • Cigarettes, cigars and cheroots

    • Manufactured tobacco (excluding biris)

    • Heated tobacco and nicotine inhalation products such as vapes

  • The earlier 14% GST schedule is deleted.

Significance

  • Signals a clear exit from the 28% + Compensation Cess framework.

  • Consolidates taxation into higher GST slabs to ensure revenue stability.

  • Reflects policy intent to discourage consumption while safeguarding tax collections.

📄 Source: Notification No. 19/2025 – Central Tax (Rate)

3. Notification No. 20/2025 – Central Tax

Shift to MRP / Retail Sale Price–Based Valuation

Introduction of Rule 31D

For specified tobacco and pan masala products, GST valuation will no longer be based on transaction value.

Value of supply = Retail Sale Price (RSP/MRP) minus GST

Products Covered

The valuation change applies to the same product categories covered under the rate notification, excluding biris.

Key Valuation Provisions

  • RSP includes all taxes, duties, cess and surcharges.

  • Where multiple MRPs are printed, the highest MRP will apply.

  • Any increase in MRP at any stage becomes the taxable value.

  • If different MRPs are declared for different regions, valuation will be based on the area-specific MRP.

Rule 86B Relaxation (ITC Payment Restriction)

  • Traders (non-manufacturers) dealing in these goods are exempt from the 99% cash payment restriction, provided GST has been paid by the supplier on an RSP basis.

Significance

  • Effectively eliminates undervaluation.

  • Aligns GST valuation with the earlier excise-style MRP regime.

  • Guarantees minimum assured tax realisation.

📄 Source: Notification No. 20/2025 – Central Tax

4. Notification No. 19/2025 – Central Tax

Legal Backing under Section 15(5)

This notification amends Notification No. 49/2023–Central Tax to formally notify goods whose value shall be determined under section 15(5) of the CGST Act.

Key Purpose

  • Specifies tobacco and pan masala products bearing RSP as goods subject to special valuation rules.

  • Overrides transaction-value-based valuation.

Importance

  • Provides statutory authority to Rule 31D.

  • Minimises valuation disputes and litigation risks.

  • Ensures uniform nationwide application.

📄 Source: Notification No. 19/2025 – Central Tax

5. How the Three Notifications Operate Together

Aspect CT (Rate) 19/2025 CT 20/2025 CT 19/2025
Focus Rate restructuring Valuation & ITC Legal authority
Core Change 28% slab removed MRP-based valuation Section 15(5) coverage
Goods Tobacco, pan masala, vapes Same goods Same goods
Outcome Higher GST slabs No undervaluation Strong legal backing

6. Practical Impact on Stakeholders

Manufacturers

  • Pricing must be strictly aligned with declared MRP.

  • Any MRP increase results in higher GST liability.

  • ERP, invoicing and compliance systems require updates for tax back-calculation.

Traders & Distributors

  • Relief from Rule 86B restrictions where suppliers pay GST on RSP basis.

  • Must ensure MRP compliance throughout the supply chain.

Tax Professionals

  • Clear shift from transaction-value disputes to MRP-based certainty.

  • Critical advisory role in pricing, packaging, valuation and compliance reviews.

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