Lok Sabha Clears Central Excise Amendments to Sustain Tax on Tobacco and Pan Masala

The Lok Sabha recently approved the Central Excise (Amendment) Bill, which aims to restructure levies on tobacco, pan masala, and related products ahead of the scheduled discontinuation of the GST compensation cess.

The legislation introduces new excise duties and a health and national security cess to ensure consistent taxation on these ‘sin goods’.

The move replaces the compensation cess mechanism introduced in 2017 with the GST rollout, which was later extended to March 2026 to cover loans taken by the government for state compensation.

New Excise Provisions

The bill sets new excise duties on various tobacco products, including cigarettes, chewing tobacco, cigars, hookahs, zarda, and scented tobacco, as per news reports.

Cigars and cigarettes will attract duties ranging from ₹5,000 to ₹11,000 per 1,000 sticks depending on size.

Unmanufactured tobacco will carry a 60–70% levy, while nicotine and inhalation products will face 100% duty. These excise rates are in addition to the standard 40% GST applied to such products.

Health and National Security Cess

The Health Security and National Security Cess Bill, 2025, applies to pan masala and other notified goods.

Collections from this cess are directed towards public health initiatives and national security while maintaining significant taxation on sin goods.

This ensures that high tax rates on tobacco and pan masala continue even after the GST compensation cess is phased out.

Background on Compensation Cess

The compensation cess was introduced alongside the GST on 1 July 2017 to offset revenue losses for states.

It was initially valid until June 2022 but extended to 31 March 2026 to repay loans taken by the Centre during the COVID-19 period. The GST Council had confirmed continuation of the cess on tobacco and pan masala until the loans are fully settled.

Impact on Taxation

These legislative changes maintain the effective tax burden on sin goods, ensuring continuity after the compensation cess ends.

Earlier GST rationalisation had fixed rates of 40% on ultra-luxury and demerit goods, while other luxury items were set at 5% or 18%. The new bills align with this framework, sustaining high taxation on tobacco and pan masala.

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Conclusion

The Central Excise (Amendment) Bill and the Health Security and National Security Cess Bill provide a seamless transition from the compensation cess, preserving revenue streams from sin goods.

The changes maintain stability in the taxation framework for tobacco, pan masala, and related products without introducing additional uncertainties.

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