Tobacco and Pan Masala Expected to Become Costlier Due to New Cess and NCCD in 2026 Budget

In the upcoming Union Budget 2026, the government is likely to introduce a new National Calamity Contingent Duty (NCCD) or a central cess on tobacco and pan masala products. This move aims to maintain the current high indirect tax burden on these sin goods following the rationalization of the Goods and Services Tax (GST) under GST 2.0. As GST rates for luxury and sin items have been capped at a uniform 40 percent slab, the existing total indirect tax incidence on tobacco (around 53%) and pan masala (up to 88%) is expected to fall. To avoid revenue loss, the government plans to offset this reduction by imposing a separate central levy outside the GST framework.

This newly proposed levy will not require GST Council approval; instead, it will be introduced through an amendment to the Finance Bill 2026 and approved directly by Parliament. The NCCD, introduced under the Finance Act, 2001, is a central duty designed to fund disaster relief and is being considered to ensure stable revenue from tobacco and pan masala post-GST compensation cess phase-out.

The existing GST compensation cess system, which helped states recover borrowed revenue shortfalls, is nearing its end after funding loans totaling nearly ₹2.7 lakh crore. As this cess phases out, the new central levy will ensure a consistent tax burden without reopening discussions on GST rates at the Council level.

Therefore, while the GST rate for tobacco products remains capped at 40 percent, the combination of GST and the new NCCD or cess will keep the overall tax incidence high, potentially making tobacco and pan masala products more expensive. This strategy is part of the government's approach to balance public health concerns with revenue generation from these widely consumed products.