Bills to replace GST compensation cess may be tabled in Lok Sabha on Monday

Demerit goods to face a new levy to finance national security and public health

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To replace the compensation cess (under goods and services tax, or GST) on demerit goods such as cigarettes and pan masala with a levy to finance national security and public health, Union Finance Minister Nirmala Sitharaman is likely to introduce two Bills in the Lok Sabha on Monday, the first day of the winter session of Parliament. 

The Centre’s move is necessary because the GST compensation cess on such products is ending soon and the GST Council has authorised the finance minister to find a mechanism to tax demerit goods. 

The Central Excise Amendment Bill, 2025, and ‘The Health Security se National Security Cess Bill, 2025’, have been listed for introduction in accordance with the legislative business of Parliament. According to sources, the excise Bill will replace the compensation cess on tobacco by levying excise duty on the demerit product. However, the compensation cess on pan masala will be replaced by a levy through the Health Security se National Security Cess Bill, 2025, with a different structure. The new cess will be imposed on the machines installed or other processes undertaken for producing pan masala. 

Earlier, in a representation before the 15th Finance Commission, the defence ministry had proposed a cess as a mechanism for funding national security. However, the commission had rejected the proposal, and had recommended a non-lapsable fund for that. 

Official sources said there would not be any change in the existing levy imposed on such demerit goods under the compensation-cess mechanism.

 

For instance, the levy on cigarettes amounts to 50-60 per cent of the retail price at present. 

Abhishek Jain, head (indirect tax) & partner, KPMG, said: “In line with the announcement of the GST Council, the government may be doing away with GST compensation cess on tobacco products, and the proposed Bill on excise and the Health Security se National Security Cess Bill may be in lieu of that.” 

The GST Council in its meeting in September had done away with the compensation cess on most products except on tobacco products. On other luxury items, the compensation cess ended on September 22, when rationalisation in GST rates was effected with just two slabs of 5 and 18 per cent. 

A 40 per cent rate was fixed for ultra-luxury goods and aerated drinks. 

The cess, originally meant to be in place for five years since the GST regime’s launch on July 1, 2017, to compensate states for revenue losses, was extended beyond 2022 owing to the pandemic shock on revenues, which compelled the Centre to borrow in order to pay the states’ dues. 

In September, Sanjay Kumar Agarwal, then chairman of the Central Board of Indirect Taxes and Customs, in an interview with Business Standard had said that repaying the compensation cess loan was likely to be completed by the end of December, after which the new levy on the tobacco products would kick in.