The Winter Session of Parliament, commencing on Monday, will see the government introduce two significant pieces of legislation aimed at restructuring the taxation framework for tobacco and pan masala. The bills propose to replace the expiring GST compensation cess with a new excise duty and a targeted health-security cess.
Key Bills to be Introduced
Finance Minister Nirmala Sitharaman is slated to present the Central Excise (Amendment) Bill, 2025 in the Lok Sabha. This bill seeks to amend the Central Excise Act of 1944. Its primary objective is to replace the current GST compensation cess levied on products like cigarettes, chewing tobacco, cigars, hookahs, zarda, and scented tobacco. Once this transition is complete, these tobacco products will be subject to GST plus a central excise duty.
Simultaneously, the Health Security se National Security Cess Bill, 2025 is expected to be introduced. This legislation aims to levy a new cess specifically on the machines or processes used in the manufacture of pan masala and other notified goods. Pan masala will thus move to a tax regime comprising GST and this new cess.
Rationale Behind the Tax Restructuring
The changes are necessitated by the impending cessation of the GST compensation cess. Originally introduced in 2017 for a five-year period to compensate states for revenue loss, the cess was later extended until March 31, 2026, to facilitate repayment of the Centre's borrowings during the Covid-19 pandemic. With the loan repayment anticipated to conclude in December, the cess is now set to be discontinued.
In September, the GST Council decided to retain the compensation cess only on tobacco and pan masala until the repayment was finalized, while discontinuing it for luxury items. The new two-bill strategy ensures that the overall tax burden on these demerit goods remains stable post the cess. These products, currently attracting 28% GST plus compensation cess, will shift to the highest GST slab of 40% as per the Council's recent restructuring, along with the new duties.
Implications and Objectives of the New Levies
The Central Excise Amendment Bill is designed to provide the government with the fiscal space to adjust excise duty rates on tobacco, thereby safeguarding the tax revenue stream. The proposed Health Security cess has a dual stated purpose: to contribute funds specifically earmarked for public health initiatives and national security needs.
This new cess will be applicable over and above all other existing taxes. Manufacturers will be mandated to file a self-declaration detailing all machines or processes at each manufacturing facility, with the cess liability calculated separately for every location.
The government has allocated six hours for the discussion on the Central Excise Amendment Bill in the Lok Sabha. Among the other thirteen bills listed for consideration during the session are:
- Jan Vishwas (Amendment of Provisions) Bill, 2025
- Insolvency and Bankruptcy Code (Amendment) Bill, 2025
- National Highways (Amendment) Bill, 2025
- Atomic Energy Bill, 2025
- Higher Education Commission of India Bill, 2025
- Securities Markets Code Bill (SMC), 2025
This legislative move underscores the government's intent to maintain revenue from sin goods while creating a new, targeted funding mechanism for critical national priorities.
