Finance Minister Nirmala Sitharaman on Monday introduced two bills in the Lok Sabha aimed at imposing excise duty on tobacco and tobacco products, and creating a new cess on the manufacture of pan masala, which will replace the existing GST compensation cess on these sin goods.
The Central Excise (Amendment) Bill, 2025, proposes to replace the GST compensation cess currently levied on all tobacco products, including cigarettes, chewing tobacco, cigars, hookahs, zarda and scented tobacco.
According to the bill’s statement of objects and reasons, it seeks “to give the government the fiscal space to increase the rate of central excise duty on tobacco and tobacco products so as to protect tax incidence,” once the GST compensation cess ends.
The Health Security se National Security Cess Bill, 2025, seeks to introduce a cess on the production of specified goods such as pan masala. The government will also have the flexibility to notify additional goods on which this cess can be levied.
At present, products such as tobacco and pan masala attract a GST rate of 28 per cent, along with a compensation cess applied at varying rates. Under the proposed excise amendment, cigars, cheroots and cigarettes would face excise duty ranging from Rs 5,000 to Rs 11,000 per 1,000 sticks. The bill also proposes a levy of 60–70 per cent on unmanufactured tobacco and 100 per cent on nicotine and inhalation products.
Currently, cigarettes draw a compensation cess of 5 per cent ad valorem plus Rs 2,076–3,668 per 1,000 sticks, depending on length.
Following the discontinuation of the compensation cess, tobacco and related products will attract 40 per cent GST along with excise duty, while pan masala will be subject to 40 per cent GST plus the Health Security se National Security Cess.
“It is proposed to levy the Health Security se National Security Cess to contribute towards the twin purposes of enabling targeted utilisation for public health, as well as national security,” the bill’s statement of objects and reasons noted.
TMC MP Saugata Ray opposed the introduction of both bills, arguing that although tobacco is harmful, the Central Excise (Amendment) Bill does not state this. On the Health Security se National Security Cess Bill, 2025, he objected on the grounds that cess proceeds are not shared with states.
When GST was rolled out on July 1, 2017, a compensation cess was introduced for five years—until June 30, 2022—to make up for state revenue losses resulting from GST implementation. This cess was later extended by four years until March 31, 2026, with collections being used to repay loans taken by the Centre to compensate states for Covid-period revenue losses.
Since that loan repayment is expected to be completed in December, the compensation cess will come to an end. On September 3, 2025, the GST Council decided that the cess on tobacco and pan masala would continue until these loans were fully repaid.
For other luxury goods, the compensation cess was withdrawn on September 22, when GST rate rationalisation came into effect with just two slabs—5 per cent and 18 per cent. A 40 per cent GST rate was introduced for ultra-luxury goods, aerated drinks and other demerit items.
The Central Excise (Amendment) Bill, 2025, and the Health Security se National Security Cess Bill, 2025, aim to ensure that the overall tax burden on sin goods such as tobacco and pan masala remains unchanged when the compensation cess is phased out.
