Centre moves tobacco, pan masala levy Bills, seeks to retain mopup

New excise and cess proposals aim to boost central revenue as GST compensation period ends; states won't share proceeds

In a move that would empower the Centre to collect additional revenue from so-called “sin goods”, Union Finance Minister Nirmala Sitharaman on Monday introduced two major taxation Bills in the Lok Sabha to further raise central excise duty on tobacco products and impose a levy on pan masala to fund expenditure related to public health and national security.

 

So far, the Centre had imposed a cess on such products since July 2017, which was shared with states to compensate them for revenue losses arising from the implementation of the goods and services tax (GST). However, the centre government stopped compensating states after the promised five-year period ended in 2022, though the compensation cess continued in order to repay the additional borrowing undertaken during Covid to meet the GST revenue shortfall.

 

With the fresh move, the Union government will not share the additional revenue collected with the states. 

 

According to D K Srivastava, chief policy adviser, EY India, the idea appears to be to make up for some of the revenue loss caused by the GST reforms. “Already one month’s data (November) indicates that GST buoyancy has come down under the new GST regime. The earlier arrangement of cess was to compensate the states and repay the debt. Now those periods are almost over. National security and public health serve the purpose of the country as a whole and not just the Union government, although the allocated power will be with the central government. That’s why the cess by the Centre is justified,” he said.

 

All India Trinamool Congress Member of Parliament (MP) Sougata Roy opposed both Bills in the Lok Sabha. On the Central Excise (Amendment) Bill, he argued that while the government seeks revenue from tobacco products, the Bill “does not mention the dangers of tobacco on packets” and does not advance public-health protections. He criticised the Centre for focusing merely on attracting excise duty from such products.

 

Roy also opposed the introduction of the Health Security se National Security Cess Bill, calling the legislation “ambiguous” and objecting to any cess that would not be shared with states under the divisible pool. He argued that the Bill, too, lacks information about the dangers of tobacco products, raising concerns that the government’s emphasis was skewed towards revenue rather than health outcomes.

 

The Central Excise (Amendment) Bill, 2025 seeks to replace the existing tariff table for tobacco and related products. The amendment brings one of the steepest overhauls of tobacco taxation in years, with most basic tobacco categories, both unmanufactured and stemmed, seeing excise rates rise from 60 per cent to 70 per cent, while cigarette duties jump sharply from earlier bands such as ₹200–545 per 1,000 sticks to ₹2,700–11,000 per 1,000, depending on length and filter type.

 

Chewing tobacco, zarda and related products face even steeper hikes, with rates moving from 25 per cent to 100 per cent, and smoking mixtures climbing from 60 per cent to 325 per cent, signalling the government’s intent to rebuild excise capacity as the GST compensation cess winds down.

 

In the Statement of Objects and Reasons, Sitharaman noted that excise duties on tobacco were sharply reduced after GST’s introduction to make space for the compensation cess, and the latest amendments are meant to rebuild that fiscal room as the cess is phased out. “Compensation cess levied on tobacco and tobacco products, wherever applicable, will be discontinued once interest-payment obligations and loan liabilities under the compensation cess account are completely discharged. 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, it is imperative to amend the table in Section IV of the Fourth Schedule to the said Act,” Sitharaman said in the statement.

 

Introducing both Bills, she said the measures would strengthen the country’s revenue buffers for critical spending. “It will augment the resources for meeting expenditure on national security and for public health, and to levy a cess for the said purposes on the machines installed or other processes undertaken by which specified goods are manufactured or produced, and for matters connected therewith or incidental thereto,” she said.

 

Alongside the excise overhaul, the government tabled the Health Security se National Security Cess Bill, 2025, which proposes a monthly cess on machines used to produce specified goods, primarily pan masala or any other items that may be later notified. The cess will be computed based on machine speed, capacity and weight slabs of the packaged product, with a detailed framework laid out for registration, self-declaration, monthly payment, audit, enforcement, confiscation and penalties. Under the new cess regime, pan masala will attract a steep, capacity-linked levy, with monthly charges ranging from ₹1.01 crore to more than ₹25 crore per machine, depending on pouch weight and machine speed, while manual units face a flat ₹11 lakh per month.

 

The cess will be levied in addition to existing GST and excise duties. Proceeds will first be credited to the Consolidated Fund of India and then appropriated by Parliament for health and national-security programmes.

 

Commenting on the development, Abhishek A Rastogi, founder of Rastogi Chambers, said the Health Security se National Security Cess Bill, 2025, marks a major shift for the pan masala and tobacco industry. By moving from a consumption-based cess to a capacity-linked one -- and raising excise duties on tobacco -- the government is tightening control, reducing tax leakages and ensuring steady revenue even after the old GST compensation cess ends. “For companies, this means higher fixed costs, stricter audits and far more paperwork, which will likely push smaller players to the edge and strengthen the position of large, organised manufacturers,” he said.