Health and National Security Cess to Apply Only on Demerit Goods

Finance Minister Nirmala Sitharaman announced that the proposed Health and National Security Cess will be levied only on demerit goods such as pan masala. Essential commodities will remain unaffected by the new levy.

Revenue collected from the cess will be shared with states for health-related schemes and awareness programmes. The minister made these remarks while introducing the Health and National Security Cess Bill, 2025 in the Lok Sabha.

Purpose of the Cess

The Bill aims to create a dedicated and predictable resource stream for health and national security. Sitharaman stated that the cess will act as a deterrent by imposing additional costs on products linked to health risks. Pan masala will attract the maximum GST rate of 40%, and the cess will be charged over and above GST. The measure seeks to discourage consumption of harmful products without impacting GST revenues.

Levy Structure and Collection

The proposed cess will be calculated based on the production capacity of machines in pan masala manufacturing units. Each factory’s liability will vary according to its installed capacity.

Since GST is levied at the consumption stage and excise duty cannot be imposed on pan masala, the cess will ensure taxation at the production level. Part of the revenue will be allocated to states for health awareness and related activities.

Impact on GST and Existing Taxes

Currently, pan masala, tobacco and similar products attract 28% GST along with a compensation cess at varied rates. With the expiry of the compensation cess, GST on pan masala will rise to 40%.

Tobacco will continue to attract excise duty, while pan masala will be subject to the new Health and National Security Cess. These changes aim to maintain revenue streams as the compensation cess mechanism winds down.

Legislative Context

On Wednesday, the Lok Sabha passed a Bill amending the Central Excise Act of 1944 to levy excise duty on tobacco over and above GST. The two Bills, the Excise Bill on tobacco and the Cess Bill on pan masala, follow the nearing end of the GST compensation cess levy.

The compensation cess was introduced in July 2017 for five years and later extended until March 2026 to repay loans taken during the Covid period. The government is now transitioning to new levies to sustain revenue for critical sectors.

Read More: FM Nirmala Sitharaman Urges Global Cooperation on Tax Transparency Amid Digitalisation.

Conclusion

The Health and National Security Cess Bill, 2025 introduces a targeted levy on demerit goods to fund health and security initiatives. By taxing production capacity rather than consumption, the measure ensures compliance and revenue stability.

Essential commodities remain unaffected, while states will benefit from shared resources for health schemes. The move reflects the government’s strategy to balance fiscal needs with public health priorities.

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