Zero Compensation Cess: Major Shift for Pan Masala & Tobacco

Government Notification Issued
The Central Government, through Notification No. 03/2025-Compensation Cess (Rate) dated December 31, 2025, has officially notified the reduction of the Goods and Services Tax (Compensation to States) Cess to “Nil” for specified pan masala and tobacco products.
Effective Date
This new “Nil” rate regime will come into force starting from 1st February, 2026.
Impacted Goods
The notification applies to a wide range of goods under Chapters 21 and 24 of the Customs Tariff, effectively removing the previous specific or ad valorem cess rates. The items now attracting Nil compensation cess include:
- Pan Masala (with or without declared retail sale price)
- Unmanufactured tobacco (bearing a brand name, with or without lime tube)
- Cigarettes, cigars, cigarillos, and tobacco substitutes
- Chewing tobacco, gutkha, khaini, snuff, jarda, and other tobacco preparations
- Smoking mixtures, hookah tobacco, and tobacco extracts/essences
Shift in Policy
This move aligns with the government’s revised policy decision regarding the levy of compensation cess under GST, transitioning these goods from a structure of high cess rates (which included specific rates linked to retail sale price or ad valorem rates like 290% or 204%) to a Nil rate structure.