Sitharaman introduces 2 bills in Lok Sabha to levy excise duty on tobacco, cess on pan masala

Finance Minister Nirmala Sitharaman on Monday introduced two bills in the Lok Sabha aimed at taxing tobacco and pan masala products, ensuring continuity of revenue after the GST compensation cess ends.

The Central Excise (Amendment) Bill, 2025 proposes to replace the GST compensation cess currently levied on tobacco products such as cigarettes, chewing tobacco, cigars, hookahs, zarda, and scented tobacco.

According to the statement of objects and reasons of the bill, 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 is discontinued.

The Health Security se National Security Cess Bill, 2025 proposes a new cess on the manufacturing of specified goods like pan masala, with the government empowered to notify additional goods for the levy.

The statement of objects and reasons explains that the cess is intended to serve “the twin purposes of enabling targeted utilisation for public health, as well as national security.”

Currently, sin goods like tobacco and pan masala attract 28 per cent GST plus a compensation cess levied at varied rates. Under the Central Excise (Amendment) Bill:

- Excise duty on cigars, cheroots, and cigarettes would range from Rs 5,000–11,000 per 1,000 sticks.

- Unmanufactured tobacco would attract 60–70 per cent duty, while nicotine and inhalation products would face 100 per cent duty.

At present, cigarettes are taxed with a compensation cess of 5 per cent ad valorem plus Rs 2,076–3,668 per 1,000 sticks, depending on the length. After the compensation cess ends, tobacco products will carry 40 per cent GST plus excise duty, and pan masala will have 40 per cent GST plus the Health Security se National Security Cess.

Opposition Concerns: TMC member Saugata Ray opposed the bills, stating that while tobacco is harmful, the Central Excise (Amendment) Bill does not mention this. He also opposed the Health Security se National Security Cess Bill, noting that cess proceeds are not shared with states.

Background: When GST was introduced on July 1, 2017, a compensation cess mechanism was established for five years, till June 30, 2022, to offset revenue losses for states. The levy was later extended by four years until March 31, 2026, with collections used to repay loans taken by the Centre to compensate states for GST losses during the COVID period. Since the loan repayment is expected to conclude in December 2025, the compensation cess will cease.

On September 3, 2025, the GST Council decided to continue the compensation cess on tobacco and pan masala until the loans are fully repaid. The cess on other luxury items ended on September 22, 2025, as part of GST rate rationalisation, implementing two slabs of 5 and 18 per cent and a 40 per cent rate for ultra-luxury goods, aerated drinks, and other demerit goods.

The introduction of the Central Excise Amendment Bill, 2025, and the Health Security se National Security Cess Bill, 2025 ensures that the tax incidence on sin goods such as tobacco and pan masala remains consistent after the discontinuation of the GST compensation cess.