Centre moves to plug GST cess gap with new excise duty, pan masala cess; what's changing?

The Union government plans to introduce two bills in the Lok Sabha on Monday to levy fresh taxes on tobacco products and pan masala as the Goods and Services Tax (GST) compensation cess heads towards expiry later this year.

The Central Excise (Amendment) Bill, 2025, will allow the government to impose excise duty on cigarettes and other tobacco products once the compensation cess ends.

The Health Security se National Security Cess Bill, 2025, will introduce a new cess on the manufacture of pan masala and potentially other so-called sin goods.

Why new levies are needed

Tobacco products and pan masala currently attract 28% GST plus compensation cess, which is charged at varying rates. The compensation cess was designed to make up for states’ revenue losses after the GST’s rollout in 2017, and was extended until March 2026 to repay COVID-era borrowings taken by the Centre.

With the loans expected to be fully repaid in December, the cess will cease to apply.

The Central Excise Amendment Bill, 2025, and the Health Security se National Security Cess Bill, 2025, will ensure that the tax incidence on sin goods like tobacco and pan masala remains the same after discontinuation of the compensation Cess.

What the excise bill does

The excise amendment replaces the compensation cess on tobacco with central excise duty, restoring fiscal space for the government to raise rates if needed.

According to the bill’s statement of objects and reasons, the measure allows the Centre to “protect tax incidence” on cigarettes, chewing tobacco, cigars, hookah products, zarda and scented tobacco after the cess ends.

What the new cess will cover

Finance Minister Nirmala Sitharaman will also introduce the Health Security se National Security Cess, initially expected to apply only to pan masala.

The cess may be extended later to other items the Centre notifies in the interest of public health or national security, excluding bidis for now.

Under the post-rationalisation structure introduced this year, the 28% GST slab has been removed. Sin goods such as tobacco and pan masala will instead fall under the highest GST slab of 40%, plus the new excise duty or cess.

Once the compensation Cess ends, sale of tobacco and related products will attract GST plus excise duty, while pan masala will attract GST plus the Health Security se National Security Cess.

The new framework is meant to maintain the current tax burden on these goods and ensure steady revenue for the Centre as the compensation cess framework winds down.

Sitharaman will table both bills in the lower house on Monday.