Finance Minister Nirmala Sitharaman on Monday introduced two pivotal taxation bills in the Lok Sabha—one to reimpose central excise duty on tobacco products and another to usher in a new dedicated cess on pan masala manufacturing, replacing the soon-to-expire GST compensation cess regime.
The Central Excise (Amendment) Bill, 2025 marks a major shift in the tax framework for tobacco-related products. Since GST’s rollout in 2017, items such as cigarettes, chewing tobacco, cigars, zarda, hookahs and other nicotine products have been subject to a GST of 28 per cent, supplemented by a compensation cess. With the compensation cess schedule coming to an end, the proposed legislation seeks to reinstate excise duty to ensure that the overall tax burden on these goods does not diminish.
According to the statement of objects and reasons, the amendment aims to “provide the government with sufficient fiscal flexibility to revise excise rates on tobacco and tobacco products for protecting overall tax incidence” once the compensation cess is phased out. The Bill proposes excise slabs ranging from ₹5,000 to ₹11,000 per 1,000 sticks on cigars, cheroots and cigarettes. The excise duty on unmanufactured tobacco is set at 60–70 per cent, while a steep 100 per cent duty is proposed for nicotine and inhalation-based products.
Currently, cigarettes attract a compensation cess of 5% ad-valorem plus a specific levy of ₹2,076–₹3,668 per 1,000 sticks depending on length. Upon the removal of the compensation cess, the tax structure will evolve to 40% GST plus excise duty, maintaining the high tax environment designed to disincentivise consumption.
Alongside this amendment, the government also brought forward the Health Security se National Security Cess Bill, 2025, which introduces a new cess on the manufacturing of pan masala and any additional products that the Centre may notify in the future. Like tobacco, pan masala currently attracts 28% GST plus compensation cess. After the transition, it is expected to draw 40% GST in addition to the new cess.
The Bill articulates a dual purpose for this fresh levy—funding public health initiatives and strengthening national security, with tax revenues earmarked accordingly. “The cess is intended to support targeted utilisation towards these two critical domains,” the explanatory note highlights.
The introduction of both bills, however, did not go uncontested. TMC MP Saugata Ray objected sharply, arguing that while tobacco is hazardous, the excise amendment fails to explicitly acknowledge its harmful nature. He also voiced constitutional concerns over the new cess, noting that cess collections are not shared with states—thereby depriving states of a revenue stream.
The move comes as the GST compensation cess mechanism enters its final phase. Initially instituted for five years from July 1, 2017, to help states transition to the new GST regime, the cess was extended until March 31, 2026. Its collections have been channelled towards repaying loans taken by the Union government to compensate states for revenue shortfalls during the pandemic years. With the outstanding loan expected to be fully cleared by December 2025, the compensation cess is poised to lapse.
The GST Council, in its meeting on September 3, 2025, had recommended continuation of the cess on tobacco and pan masala only until loan repayment was completed. For all other luxury products, the cess was discontinued following the Council’s rate rationalisation exercise on September 22, which revamped the GST structure into two principal slabs—5% and 18%—while imposing a 40% GST rate on ultra-luxury and demerit goods.
Against this backdrop, the Centre’s two new bills are designed to preserve the existing tax burden on tobacco and pan masala even after the compensation cess expires, ensuring no dilution of revenue or public health objectives tied to high taxation of sin goods.
