The Central Government has formally reintroduced a capacity-based excise duty regime for chewing tobacco, jarda scented tobacco, and gutkha, signalling a major shift in taxation and compliance for the tobacco sector. The new framework will come into force from February 1, 2026, following a series of notifications issued by the Ministry of Finance on December 31, 2025.
The move revives the special levy mechanism under Section 3A of the Central Excise Act, 1944, which allows duty to be collected based on deemed production capacity rather than actual output.
Statutory Backing Through Central Excise Amendment Act, 2025
The policy change flows from the Central Excise (Amendment) Act, 2025, notified through Notification No. 03/2025-Central Excise (N.T.), appointing February 1, 2026, as the commencement date.
Subsequently, Notification No. 04/2025-Central Excise (N.T.) declared chewing tobacco (including filter khaini), jarda scented tobacco, and gutkha—when manufactured using packing machines and packed in pouches—as “notified goods”for the purposes of Section 3A.
Packing Machine-Based Taxation Replaces Production Valuation
Under the new rules, excise duty will no longer be assessed on the basis of actual production or clearance. Instead, liability will be determined by the number, type, and speed of packing machines installed in the factory.
The monthly duty payable will depend on:
- the maximum packing speed of the machine (pouches per minute),
- the retail sale price (RSP) of the pouch, and
- the number of operational machines during the month.
This model effectively presumes production and significantly narrows the scope for under-reporting or suppression.
Deemed Production Capacity Linked to Machine Speed and RSP
The Rules prescribe a detailed capacity matrix, categorising machines into speed slabs—up to 500, 501–1000, 1001–1500, and above 1500 pouches per minute.
Higher-speed machines attract proportionately higher deemed production volumes, with separate benchmarks for products priced up to ₹2 per pouch and those priced above ₹2.
For multi-rack or multi-line machines, the rules clarify when such equipment will be treated as one machine or multiple machines, a critical issue likely to have revenue and litigation implications.
Mandatory Declarations and Technical Certification
Every manufacturer is required to file a detailed Form CE-DEC-01 declaration by February 7, 2026, or within seven days of starting production.
The declaration must disclose technical parameters such as:
- gearbox ratio,
- number of racks and funnels,
- RPM of the main motor, and
- certified maximum packing speed,
all of which must be certified by a Chartered Engineer.
Jurisdictional officers are empowered to physically inspect factories, verify machine specifications, and even seek third-party expert opinions before finalising capacity orders.
Monthly Duty Payment and Pro-Rata Adjustments
Excise duty under the new regime must be paid monthly by the 6th day of each month. New manufacturers are required to pay duty on a pro-rata basis for the first month of operation.
If machines are added, removed, or altered during the month, duty will be calculated based on the highest number of machines installed on any day of that month. Any differential duty arising from such changes must be paid within five days.
Limited Relief for Temporary Shutdowns
The rules allow abatement of duty only in tightly controlled circumstances. Relief is available if a packing machine remains non-operational for 15 consecutive days or more, subject to prior intimation and physical sealing of the machine by excise authorities.
No relief is available for short-term stoppages, maintenance breaks, or partial shutdowns, reinforcing the fixed-liability nature of the regime.
Mandatory CCTV Surveillance and Record Retention
A major compliance requirement under the 2026 Rules is the mandatory installation of CCTV systems covering all packing machine areas.
Manufacturers must:
- retain CCTV footage for 48 months, and
- produce footage within 48 hours of a written request by excise authorities.
Failure to provide CCTV records can trigger penal consequences, including adverse presumptions regarding clandestine manufacture.
Strict Controls on Retail Sale Price (RSP) Declaration
The Rules impose stringent obligations relating to the declaration of retail sale price on pouches. Any non-declaration, alteration, or manipulation of RSP after removal from the factory can lead to:
- seizure of goods,
- application of the highest RSP slab across all machines, and
- enhanced duty liability for the relevant period.
This provision is aimed squarely at curbing price-based tax arbitrage.
Restricted Input Credit and Bar on Duty-Free Exports
Input tax credit availability has been sharply curtailed. CENVAT credit is permitted only on bulk packs, while credit on inputs or capital goods used in manufacture is largely disallowed.
The rules also prohibit duty-free exports, closing a route historically used to divert goods into the domestic market without payment of excise duty.
Policy Objective: Plugging Evasion and Stabilising Revenue
The reintroduction of Section 3A reflects the government’s view that gutkha and chewing tobacco remain high-risk sectors for tax evasion, despite the GST framework.
By shifting taxation to a machine-capacity model, the government aims to ensure revenue certainty, reduce valuation disputes, and strengthen enforcement without relying solely on post-facto investigations.
Conclusion
The Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines Rules, 2026 mark a decisive shift back to presumptive excise taxation. As the framework takes effect from February 1, 2026, manufacturers will need to urgently recalibrate their compliance systems, while the sector braces for tighter surveillance and reduced flexibility.
Notification Details
Notification No. 04/2025-Central Excise
Date: 31/12/2025
