Centre moves Bills for pan masala cess and higher duties on tobacco products

The Union government on Monday (December 1, 2025) introduced a Bill in Parliament seeking to raise the excise duty on tobacco products, and another legislation targeting the manufacture of pan masala.

Union Finance Minister Nirmala Sitharaman tabled the two Bills — The Health Security se National Security Cess Bill, 2025 and the Central Excise (Amendment) Bill, 2025 — amid Opposition sloganeering. The Bills are aimed at replacing the revenue from the Goods and Services Tax (GST) compensation cess on tobacco products, which will be discontinued soon. The Health Security se National Security Cess also proposes to augment funding for health and national security through levy of cess on “machines installed, or other processes undertaken in the manufacture of pan masala”.

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The GST compensation cess was introduced in 2017 during the launch of the GST system. The proceeds were to be used to compensate States for any losses they faced due to the implementation of GST for a period of five years. During the COVID-19 pandemic years of 2020-21 and 2021-22, the proceeds from this cess fell short of the compensation requirement, leading to the Centre borrowing money to compensate the States.

The compensation cess on tobacco products is to be discontinued once the government pays back interest on these loans. According to sources in the Ministry of Finance, this repayment will be completed in the next few months. 

However, with the removal of this cess, the effective tax rate on and revenues from tobacco products would fall significantly. To overcome this shortfall in revenue, the Central Excise (Amendment) Bill has been introduced “in order 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”. 

“With the levy of GST and compensation cess on tobacco and tobacco products, the rates of central excise duties were reduced significantly to allow for the levy of compensation cess without large impact on their tax incidence,” the ‘Statement of objects and reasons’ of the Bill said. 

The Health Security se National Security Cess Bill seeks to “augment the resources for meeting expenditure on national security and for public health” by levying a cess on the “machines installed, or other processes undertaken in the manufacture of pan masala”. 

The Bill also allows for the imposition of this cess on “any other goods which may be notified”.

“The cess is linked to the production capacity of machines or other processes rather than the quantity actually produced of such specified goods,” according to the ‘Statement of objects and reasons’ of the Bill. 

“The Bill provides for taxable persons to self-declare all machines or processes for each factory or premises, and the cess would be calculated in the aggregate for each such location,” it added.