New cess revenue to be shared with states, says FM Nirmala Sitharaman

Parliament passes Central Excise (Amendment) Bill 2025

Revenue from the proposed Health Security se National Security Cess Bill, 2025 will be shared with states for spending on health-related schemes, Finance Minister (FM) Nirmala Sitharaman said on Thursday while moving the Bill for discussion in the Lok Sabha. 

The minister clarified that the proposed levy is a cess on demerit goods, and not on any essential commodity. She said the first objective is to curb health risks arising from the consumption of products such as pan masala, whose harmful effects are well-documented. “By imposing this cess and increasing the price of pan masala, we believe consumption will reduce. It is meant to work as a deterrent,” she said. 

The second objective relates to national security, which requires sustained investment. The cess is, therefore, designed to fund critical national priorities without burdening ordinary citizens on essential consumption. She emphasised that although cess revenues are normally retained by the Centre, in this case the revenue will be shared with  states through a health-related scheme, allowing them to use it for awareness-building and similar programmes. “This is a tax in the form of cess, but we intend to give a share to the states through schemes tied to health,” Sitharaman said. 

Addressing concerns about the integrity of goods and services tax (GST), the minister said the cess does not dilute or weaken the GST structure as pan masala is already classified as a demerit good within it. Under GST, the maximum permissible rate on such goods is 40 per cent, comprising GST plus compensation cess. 

“Even today, pan masala attracts GST on consumption at 28 per cent plus compensation cess, which is anyway tapering off. So, taking it to 40 per cent is within the GST framework,” she said. 

The finance minister further explained that GST on these products is based on consumption, whereas excise duties — like those imposed on cigarettes — are based on production capacity. While cigarettes continue to attract excise due to their excisable nature, pan masala does not fall under the excise regime. “Tobacco is in GST, but cigarettes also attract excise. Yesterday, excise was increased on cigarettes. But pan masala is not excisable,” she noted. 

Meanwhile, Parliament on Thursday passed the Central Excise (Amendment) Bill, 2025, with Rajya Sabha clearing and returning it to the Lok Sabha. 

As the cess ends, she said, tobacco items originally handed over to GST for compensation purposes will naturally return to the Centre’s excise framework, though tobacco will continue to be taxed at the highest GST demerit rate of 40 per cent. 

She added that the GST Council in its last meeting discussed the issue and, as agreed earlier, the compensation cess collection is expected to stop “probably end of December. 

"Let me assure here itself straight away that tobacco products will still be taxed under the demerit category at 40 per cent in the GST frame of things," Sitharaman said. 

Earlier, the combined incidence (28 per cent GST plus cess) reached 53 per cent to 88 per cent on different cigarette categories; now the ceiling under GST alone is 40 per cent, giving an impression of lower taxation, she pointed out. 

“The intent is not to make tobacco more affordable,” she clarified, adding that India’s current tax incidence — about 53 per cent of retail price — is well below the World Health Organisation benchmark of 75 per cent, unlike many countries that revise tobacco taxes annually and link them to inflation. Hence, the excise re-imposition aims to retain largely the same tax burden, ensuring cigarettes do not become cheaper. 

She also added that beedis will come back to excise, but their tax incidence will not be changed, recognising that beedi workers come from lower-income backgrounds and “nothing should hurt their livelihood”.

 

The Central Excise (Amendment) Bill, 2025, along with the Health Security se National Security Cess Bill, 2025, comes as the GST compensation cess approaches its expiry, with repayment of the Covid-period borrowing expected to conclude in the coming weeks. When GST was introduced on July 1, 2017, a compensation cess was created for five years to make up for states’ revenue losses, and was later extended till March 31, 2026, to service the ₹2.69 trillion loan taken for state compensation during the pandemic.