Government Introduces Two Bills to Replace GST Cess on Tobacco and Pan Masala Products

The government plans to introduce two bills in the Lok Sabha on Monday. These bills aim to impose excise duty on tobacco products and a new cess on pan masala manufacturing. The Central Excise Amendment Bill, 2025, will replace the existing GST compensation cess on tobacco items like cigarettes and cigars. This change is intended to maintain tax levels after the cessation of the GST compensation cess.

The Health Security se National Security Cess Bill, 2025, proposes a new cess on certain goods, including pan masala. The government may also extend this cess to other products. Currently, sin goods such as tobacco and pan masala are subject to a 28% GST plus a compensation cess at varying rates. With the end of the compensation cess, these goods will face GST plus excise duty or the new health and security cess.

Impact on Sin Goods

Sin goods will now be taxed under the highest GST slab of 40%. The proposed Health Security se National Security Cess aims to support public health and national security initiatives. This cess will be in addition to any other applicable taxes or duties. Businesses must declare all machinery or processes for each factory or premises, with the cess calculated for each location.

Finance Minister Nirmala Sitharaman is set to introduce these bills. The GST compensation cess was initially implemented on July 1, 2017, for five years until June 30, 2022. It was later extended until March 31, 2026, to repay loans taken during the Covid period for compensating states' GST revenue losses. With loan repayments expected to conclude in December, the compensation cess will end.

Future Taxation Framework

The GST Council decided on September 3, 2025, to continue the compensation cess on tobacco and pan masala until loans are repaid. For other luxury items, the compensation cess ended on September 22 with GST rate rationalisation into two slabs: 5% and 18%. A 40% rate applies to ultra-luxury goods and aerated drinks.

The Central Excise Amendment Bill, 2025, along with The Health Security se National Security Cess Bill, 2025, ensures that tax levels on sin goods remain unchanged after the cessation of the compensation cess. This approach maintains fiscal stability while addressing public health and security concerns.

With inputs from PTI