Centre introduces 2 bills to levy new excise, cess on tobacco, pan masala
After cess ends, tobacco gets 40% GST plus excise, while pan masala draws 40% and security cess
A file image of Finance Minister Nirmala Sitharaman (Photo: @CryptooIndia/X)
New Delhi, Dec 1: Finance Minister Nirmala Sitharaman, on Monday, introduced two bills in the Lok Sabha to levy excise duty on tobacco and tobacco products, and a new cess on manufacturing of pan masala, which will replace the GST compensation cess on such sin goods.
The Central Excise (Amendment) Bill, 2025, will replace the GST compensation cess, which is currently levied on all tobacco products like cigarette, chewing tobacco, cigars, hookahs, zarda and scented tobacco.
The bill 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, according to the statement of objects and reasons of the bill.
Sin goods like tobacco and pan masala currently attract a GST of 28%, plus a compensation cess which is levied at varied rates.
The Central Excise (Amendment) Bill, 2025 seeks to levy excise duty on cigars/cheroots/cigarettes in the range of Rs 5,000–Rs 11,000 per 1,000 sticks. Also, it proposes levy of 60-70% on unmanufactured tobacco and 100% on nicotine and inhalation products.
Currently, cigarettes attract a compensation cess of 5% ad-valorem plus a Rs 2,076-3,668 per 1,000 sticks cess, depending on the length.
Once the compensation cess ends, sale of tobacco and related products will attract a 40% GST plus excise duty, while pan masala will attract 40% GST plus the Health Security cum National Security Cess.
"It is proposed to levy the Health Security cum National Security Cess to contribute towards the twin purposes of enabling targeted utilisation for public health, as well as national security," the statement of objects and reasons of the bill said.
At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.
The levy of compensation cess was later extended by four years till March 31, 2026, and the collection is being used to repay the loan that the Centre took to compensate states for the GST revenue loss during the Covid period.
Since that loan repayment is going to be fully repaid sometime in December, the compensation cess will cease to exist.
On September 3, 2025, the GST Council had decided to continue with the compensation cess on tobacco and pan masala till the loans taken are repaid.
On other luxury items, the compensation cess ended on September 22, when the GST rate rationalisation was implemented with just 2 slabs of 5 and 18%.
A 40% rate was fixed for ultra-luxury goods, aerated drinks and other demerit goods.
The Central Excise Amendment Bill, 2025, and The Health Security cum National Security Cess Bill, 2025 will ensure that the tax incidence on sin goods like tobacco and pan masala remains the same after discontinuation of the compensation cess.
PTI