Finance Minister Nirmala Sitharaman presented two bills in the Lok Sabha on Monday to impose excise duty on tobacco and its products, along with a new cess on the production of pan masala. These measures will replace the existing GST compensation cess on such goods known for their harmful impact.
The Central Excise (Amendment) Bill, 2025, is set to substitute the current GST compensation cess, which applies to various tobacco items including cigarettes, chewing tobacco, cigars, hookahs, zarda, and scented tobacco.
The bill’s objective is to allow the government flexibility to raise the central excise duty rates on tobacco products to maintain tax levels once the GST compensation cess is phased out. Additionally, the Health Security and National Security Cess Bill, 2025, aims to introduce a cess specifically on pan masala production, with the possibility of extending it to other goods through government notification.
Presently, tobacco and pan masala are subject to a 28% GST rate along with varying compensation cess rates. The proposed central excise amendment bill outlines excise duty rates for different tobacco products, ranging from Rs 5,000 to Rs 11,000 per 1,000 sticks for cigars/cheroots/cigarettes. It also suggests a levy of 60-70% on unmanufactured tobacco and 100% on nicotine and inhalation products.
Cigarettes currently bear a compensation cess of 5% ad-valorem along with a cess ranging from Rs 2,076 to Rs 3,668 per 1,000 sticks based on their length. Following the cessation of the compensation cess, tobacco sales will be subject to a 40% GST plus excise duty, while pan masala will incur a 40% GST along with the Health Security and National Security Cess.
The purpose of the Health Security and National Security Cess is to contribute towards public health and national security needs, as highlighted in the bill’s objectives. TMC member Saugata Ray expressed concerns over the bills, emphasizing the harmful effects of tobacco and the lack of revenue sharing with states from the cess proceeds.
Initially introduced during the rollout of GST in 2017, the compensation cess mechanism was extended to compensate for state revenue losses due to GST implementation. The extension of the compensation cess collection until March 31, 2026, aims to repay the state compensation loans taken during the Covid period.
As the repayment of these loans nears completion by December, the compensation cess is set to be phased out. The GST Council’s decision on September 3, 2025, to continue the compensation cess on tobacco and pan masala until the loan repayment is finalized aligns with this goal.
With the recent cessation of the compensation cess on luxury items following the GST rate rationalization, the new bills ensure that the tax burden on sin goods like tobacco and pan masala remains consistent post the compensation cess discontinuation.