Sitharaman moves Bills in LS to levy excise duty on tobacco, cess on pan masala

Even as Lok Sabha proceedings were washed out on the first day of the winter session amid Opposition protests over the special intensive revision (SIR) of electoral rolls, the government on Monday introduced two Bills seeking to impose an excise duty on sin goods such as tobacco and tobacco products, and to levy a new cess on the manufacturing of pan masala.

Amid the uproar, Finance Minister Nirmala Sitharaman introduced the Central Excise (Amendment) Bill, 2025, which proposes changes to the Central Excise Act, 1944. The Bill will replace the current GST compensation cess on cigarettes, chewing tobacco, cigars, hookahs, zarda and scented tobacco.

She also introduced the Health Security se National Security Cess Bill, 2025, which seeks to impose a new cess on machines or processes used in the manufacture of pan masala and other notified goods.

The Central Excise (Amendment) Bill aims to give the government fiscal space to raise central excise duty on tobacco products to maintain the current tax incidence once the GST compensation cess ends. The Health Security Se National Security Cess Bill will similarly replace the compensation cess on pan masala.

It seeks to “augment the resources for meeting security expenditure on national security and for public health, and levy a cess for the said purposes on the machines installed or other processes undertaken by which specified goods are manufactured or produced”. The proposed cess will apply in addition to all other taxes.

Manufacturers will be required to file self-declarations of all machines and processes at each facility, with the cess calculated for each location.

The GST compensation cess, introduced in 2017 for five years to offset states’ revenue losses, was later extended until March 31, 2026, to repay the Centre’s Covid-era borrowing. With the repayment expected to be completed in December, the cess is set to end.

In September, the GST Council decided to retain the cess only on tobacco and pan masala until repayment was complete, ending it for luxury items on September 22. Those goods have now shifted to a simplified two-rate GST structure of 5 per cent and 18 per cent, with a special 40 per cent slab for ultra-luxury and demerit goods.

The two new Bills ensure that the tax burden on tobacco and pan masala remains unchanged once the compensation cess is withdrawn.