Three Bills and a Budget: How the winter session impacts future budgets

Three laws passed in Parliament could boost central revenues, reshape GST cess flows, shift MGNREGA costs to states and create new budget headroom ahead of the 2026-27 Union Budget

Few winter sessions of the Indian Parliament have had as impactful an influence on the Union government’s finances as the one that concluded last week. For good reasons, the fortnight-long winter session that ended on December 19 will also be remembered for the way the government brought in several legislative Bills at a very short notice and ignored the Opposition demand for referring them to parliamentary committees for deeper scrutiny.

 

But, quite apart from that, there has also been little discussion over the impact of three legislative Bills, introduced during the just-concluded winter session of Parliament, on Finance Minister Nirmala Sitharaman’s forthcoming Budget for 2026-27.

 

Let us begin with the Health Security Se National Security Cess Act, 2025. The new law has levied a cess on the production of goods such as pan masala and any other goods that may be notified by the Union government.

 

There is a brief context to this move. On September 3, 2025, the Goods and Services Tax (GST) Council decided to rationalise the GST rate regime by reducing the prevailing four slabs (5 per cent, 12 per cent, 18 per cent and 28 per cent) to a simplified three-rate structure — a merit rate of 5 per cent for essential and priority sector goods and services, a standard rate of 18 per cent for most items, and a demerit rate of 40 per cent for a selected list of sin and luxury goods.

 

The new rate system took effect from September 22. Along with the enforcement of the new rates from that date, the GST compensation cess, levied at varying rates, was also discontinued for all items except tobacco and related products, including pan masala. The cess on tobacco products was to continue until the Union government repaid the outstanding loan (including interest obligations) incurred by it to compensate states for the revenue shortfall caused during the Covid pandemic. According to available indications, the repayment liability should be over by the end of December 2025. Herein lies the importance of the Health Security Se National Security Cess Act, 2025, and its significance for the Union Budget.

 

So, when the GST compensation cess is withdrawn, the new cess under a new law for pan masala will come into force. As of now, the new cess law has specified rates only for pan masala. But note that the new law can extend it to other tobacco products through a notification. Thus, expect the tobacco industry to continue to pay a new kind of tax in lieu of the GST compensation cess.

 

Nothing wrong in this move per se, except that there is a vital difference in the way this would impact the Centre and the states. If GST compensation cess had continued, its collections would have been shared among the Centre and the states in accordance with a formula. But the new cess will be collected and kept by the Centre in its coffers. Needless to say the Union Budget will benefit as a result.

 

In the coming years, this amount will only increase and even if a dedicated fund for health care and national security is created to finance such expenses from the cess collections, it is undeniable that the Centre’s finances will be a net gainer. If instead the Centre had imposed an extra levy on such tobacco products either under the GST regime or by way of an excise duty, the states would also have benefitted by way of the revenue share mandated under the GST laws or the Finance Commission’s devolution formula.

 

The second legislative initiative, already passed by Parliament, was to revamp the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and rename it as Viksit Bharat Guarantee for Rozgar and Ajeevika Mission (Gramin) Act. Quite understandably, the renaming of the law became a political controversy. But the greater significance of the new law was the way it increased the financial responsibility of the states in implementing the rural employment scheme, which now promised to offer 125 days of work in a year instead of the earlier guarantee of 100 days of work.

 

The new law introduced a new formula for sharing the cost of running the scheme. The earlier law required states to cover about 10 per cent of the cost of the scheme, while the Centre bore about 90 per cent of the burden. But the new law reduced the Centre’s expenditure share to 60 per cent and raised the state’s expenditure share to 40 per cent. In one stroke, the Union government’s financial burden on account of this law should come down by about a third.

 

Consider the following numbers. Over the past three years, the Union government has been spending about ₹85,000 to ₹90,000 crore under MGNREGA. Taken together with the share of the states, the total annual expenditure under this head would be about ₹1 trillion. The average number of days of employment per household in the last three years under the old programme has been between 48 and 52 days. Thus, even if the number of days of work to be provided under the new law sees no change, the Union government’s share in the total expenditure under the new law would be down to about ₹60,000 crore, a decline of about 30-33 per cent. This will be a substantial saving for the Centre, just as the states would be burdened with higher spending under this head.

 

The third piece of legislation pertains to the capital market. The Securities Markets Code, introduced in Parliament in the winter session, has been referred to the Parliamentary Standing Committee on Finance for further scrutiny. The new Code has several reform initiatives that will strengthen the regulatory system for the securities markets. But a key provision in the proposed law will help the central exchequer secure a steady transfer of resources from the Securities and Exchange Board of India (Sebi), almost on the lines of a system followed by the other financial sector regulator, the Reserve Bank of India (RBI).

 

The Code proposes the constitution of a reserve fund for meeting the expenditure incurred by Sebi and a provision for transferring its residual corpus to the Consolidated Fund of India. In addition, all sums realised by Sebi by way of penalty will have to be credited to the central exchequer. The manner and the quantum of such transfer to the Union government will be prescribed through appropriate rules. Sebi is not as rich a regulator as the RBI. At the end of March 2024, its general fund had a closing balance of ₹5,573 crore, including a surplus of ₹1,065 crore. But the new system of transferring surplus to the Union government will provide a steady source of revenue for the finance ministry in the years to come.

 

In sum, the three legislative measures may not immediately give the finance minister a big cushion in budget making. But these certainly have the potential of becoming a steady additional source of revenue for the Centre in the years ahead. However, two of the laws — one imposing a cess on pan masala and the other changing the funding pattern for the rural jobs programme — show how the Centre’s gains come at the cost of states, whose revenue sources may be shrinking and expenditure burden on schemes decided by the Centre may be rising. This has other implications for India’s public finances in general. But that is another story.