New Delhi, 1 Dec

Finance Minister Nirmala Sitharaman on Monday introduced two significant bills in the Lok Sabha aimed at maintaining the tax burden on tobacco, pan masala and other ‘sin goods’ once the GST compensation cess ends. The proposed laws seek to impose central excise duty on tobacco products and introduce a new cess on pan masala manufacturing, ensuring government revenues from these high-risk products remain stable.

The first legislation, The Central Excise (Amendment) Bill, 2025, will replace the GST compensation cess that is currently applied to all tobacco products, including cigarettes, chewing tobacco, cigars, hookahs, zarda and scented tobacco. 

According to the bill’s statement of objects and reasons, the amendment will provide the Centre with “fiscal space to increase the rate of central excise duty on tobacco and tobacco products” after the compensation cess is withdrawn.

The second proposal, The Health Security se National Security Cess Bill, 2025, introduces a new cess on the production of specified goods, beginning with pan masala. The government also retains the power to notify additional products in the future. This cess is designed to replace the existing GST compensation cess on pan masala and support two key goals: improving public health and contributing to national security.

At present, sin goods such as tobacco and pan masala attract 28% GST, in addition to a compensation cess levied at varying rates. With the new amendments, tobacco products will face 40% GST plus central excise duty, while pan masala will incur 40% GST plus the proposed new cess.

Under the Central Excise amendment, the government plans to levy excise duty ranging from ₹5,000 to ₹11,000 per 1,000 sticks on cigars, cheroots and cigarettes. For unmanufactured tobacco, a duty of 60–70% is proposed, while nicotine and inhalation products will face a 100% duty. Currently, cigarettes attract a compensation cess of 5% ad-valorem plus ₹2,076–3,668 per 1,000 sticks, depending on size.

TMC MP Saugata Ray opposed the introduction of the bills, arguing that while tobacco is known to be harmful, the Central Excise amendment does not explicitly mention this. He also objected to the new cess bill on the grounds that cess proceeds are not shared with states.

When the GST regime was introduced on July 1, 2017, the compensation cess was created to offset state revenue losses for five years, until June 30, 2022. The levy was extended by another four years, until March 31, 2026, to repay loans taken during the Covid-19 period to compensate states. With the final repayment expected in December, the compensation cess is set to be discontinued.

In September 2025, the GST Council agreed to maintain the cess on tobacco and pan masala until all outstanding loans were cleared. For other luxury items, however, the cess was withdrawn on September 22 following GST rate rationalisation, which streamlined rates into two slabs—5% and 18%—while fixing a 40% rate for ultra-luxury and demerit goods.

The two newly introduced bills aim to ensure that the tax burden on sin goods remains unchanged even after the compensation cess era ends, preserving both revenue stability and public-health deterrence.