The Government Presents New Tobacco and Pan Masala Taxes Bill, Will There be Changes in Price

The finance minister, Nirmala Sitharaman, has presented the Health Security National Security Cess Bill, 2025, along with an amendment to the Central Excise Act, in the Lok Sabha, as the current GST compensatory cess ends.

The bill and the amendment were introduced following the GST Council's move in September, which decided to split the tax incidence into two slabs, 5 per cent and 18 per cent, and abolish the compensation cess, leaving tobacco. The GST Council has introduced an additional 40 per cent slab for harmful or luxury products like tobacco and pan masala.

Currently, tobacco and pan masala attract 28 per cent GST and an additional compensatory cess. This cess varies widely depending on the product. In some cases, such as smoking mixers for pipes, the cess can go up to 290 per cent. The compensatory cess was primarily intended to end in June 2022 but was extended until March 2026. The money collected was used to repay loans taken by the Centre to cover state revenue losses during the COVID-19 pandemic.

As the loan repayments are expected to be completed by December 2025, the compensation cess will be abolished. To prevent a sudden decline in tax collection, the government is introducing new bills.

What are in the two new bills?

While the Central Excise Amendment Bill will allow excise duty to be levied on tobacco products once the cess ends, the Health Security and National Security Cess Bill will introduce a new levy on pan masala and other products that the government may announce later. The Health Security and National Security Cess Bill collects an additional tax for a specific purpose.The proposed bill directs the funds towards public health programmes and national security initiatives. The proposed bill calls for using the cess to give these sectors targeted funding..

An excise duty is a tax levied on products manufactured within the country, which gives the government the ease to adjust rates and earn revenue.

How the bill affects the manufacturers

Manufacturers of pan masala and other specified products will be urged to submit self-declarations about all machinery and the processes used in their factories. The cess will then be calculated based on the total production capacity of each location. The system aims to make tax collection more transparent and efficient.

Will the price of tobacco and pan masala rise?

With the abolition of the 28 per cent GST slab, tobacco and pan masala will now come under the highest GST slab of 40 per cent. This means that after the end of the compensatory cess, the tobacco products will be charged 40 per cent GST and excise duty, while pan masala will be levied 40 per cent GST and the new health and safety and national security cess. In simple terms, the government is ensuring that the total tax burden on these products will remain unchanged even though the old cess system is being phased out.

The introduction of the Central Excise Amendment Bill, 2025, and the Health and National Security Cess Bill, 2025, will ensure continuity in taxation and avoid any shortfall in government revenue from these products. This move reflects the government's double approach: to discourage consumption of harmful products by keeping taxes high, while ensuring revenue for public health and national security expenditure.