Government aims to retain high tax burden on harmful products even after compensation cess regime ends; new Health Protection to National Security Cess likely to become permanent revenue instrument.

New Delhi (Economy India): In a major policy move with long-term implications for public health financing and indirect tax administration, the Union Government is set to introduce two significant bills in the Lok Sabha that will effectively replace the GST Compensation Cess on tobacco, pan masala and other harmful consumables.

The Central Excise (Amendment) Bill, 2025 and the Health Protection to National Security Cess Bill, 2025 have been formally listed for introduction on Monday. Finance Minister Nirmala Sitharaman will introduce both legislations, signalling the government’s intent to ensure that sin goods continue to face high taxation, even after the sunset of the GST compensation cess.

Why the New Bills Matter: End of GST Compensation Cess, But Not of Tax Pressure

The GST Compensation Cess—levied on items like tobacco, cigarettes, aerated drinks, pan masala, coal and automobiles—was originally designed as a temporary measure to compensate states for revenue loss for the first five years of GST implementation.

Although the compensation period was extended due to COVID-era disruptions, the legal authority to levy the cess cannot continue indefinitely. With its expiry, the Centre cannot legally impose the old cess under the GST framework.

However, reducing the tax burden on harmful products such as tobacco and pan masala could lead to:

• Increased consumption of health-damaging items
• Reduced revenue for states and the Centre
• Undermining India’s public health targets
• Violation of WHO guidelines on tobacco taxation

To prevent this scenario, the government is creating a new legal architecture to keep the overall tax incidence at the same or higher level.

What the New Legislations Propose

Central Excise (Amendment) Bill, 2025

This bill seeks to amend the Central Excise Act to restore the power of the Union Government to levy excise duty on selected products outside the GST framework.

The amendment will specifically target:

• Cigarettes
• Tobacco and chewing tobacco
• Pan masala
• Gutkha-like mixtures
• Other harmful items deemed fit for sin taxation

The purpose is not to double-tax but to substitute the earlier compensation cess with a fresh duty so that total taxation remains consistent.

Health Protection to National Security Cess Bill, 2025

This newly conceptualized cess has a dual purpose:

Health Protection:

To financially support programmes related to cancer care, tobacco cessation, and broader public health initiatives. High taxation on tobacco is a globally recognised measure to fund health systems.

National Security Funding:

Revenue from this cess may partially support critical national security-related expenditure, broadening the justification for sin taxation.

The bill provides a permanent mechanism similar to the existing road cess or infrastructure cess but dedicated to public health and national security.

High Taxation on Harmful Products: Global Best Practice

Tobacco taxation is recognised by the World Health Organization (WHO) as one of the most effective strategies to reduce consumption. India, a signatory to the WHO Framework Convention on Tobacco Control (FCTC), is obligated to:

• Maintain high excise duty on tobacco
• Prevent affordability through inflation-adjusted taxation
• Use taxation as a public health instrument

A drop in the tax burden due to the expiry of the GST cess would have contradicted these commitments.

The government’s move aligns India with global public health standards, while also preserving a critical source of revenue.

Impact: What It Means for Consumers, Industry and States

For Consumers:

Despite expectations from some quarters, the price of cigarettes, tobacco or pan masala will not decrease. In fact, depending on the cess rates announced, prices may even rise modestly.

For Industry:

Manufacturers in the cigarette and pan masala sector will have to adapt to:

• A revised excise-based tax structure
• New compliance and reporting guidelines
• Fresh labelling requirements based on cess levy

This may tighten margins and reduce consumption, which public health experts see as a positive outcome.

For Governments (Centre & States):

States receive a significant portion of revenue from sin goods. The new cess will help:

• Maintain stable revenue flows
• Avoid fiscal deficits due to loss of GST compensation
• Support health and security sectors sustainably

Political and Economic Context: Why Now?

The government’s move comes at a critical fiscal moment:

• The GST compensation window has permanently closed.
• States are demanding new revenue streams to support welfare schemes.
• Health expenditure has risen significantly post-pandemic.
• Tobacco consumption remains a major public health challenge.

Economic analysts believe that maintaining a steady revenue stream from tobacco and pan masala is essential. In FY 2024–25 alone, GST compensation cess on tobacco and related goods contributed over ₹55,000 crore to the exchequer.

Expert Views

Public health experts have welcomed the move, saying high taxation reduces tobacco consumption among youth and low-income groups.
Industry bodies, however, argue that the frequent restructuring of tax frameworks creates uncertainty.

A senior economic analyst told Economy India:

“The government’s intent is clear — harmful products will not be allowed to become cheaper. Revenue neutrality is secondary; public health is the primary driver.”

What Happens Next?

Once introduced, the bills will undergo:

• Parliamentary debate
• Committee scrutiny (if referred)
• Passage in both Houses
• Presidential assent

The new cess structure is expected to be notified soon after approval, ensuring uninterrupted taxation on sin goods.

The introduction of the two bills marks a crucial transition in India’s indirect tax policy. It ensures that even after the GST compensation era ends, the taxation of tobacco, pan masala and other harmful goods remains stringent, stable and aligned with the country’s public health priorities.

The move is expected to strengthen both health financing and national security funding, while reinforcing India’s commitment to global health standards.

(Economy India)