Pan Masala Cess to Generate ₹14,000 Crore in FY27

The Union government expects to raise significant revenue through the newly introduced Health and National Security Cess on pan masala manufacturing. 

As outlined in the Budget documents, the cess is projected to generate ₹14,000 crore in the next fiscal year, strengthening funding for priority areas such as public health and national security while maintaining the overall tax burden on pan masala at existing levels.

Key Features of the Health and National Security Cess

Effective February 1, the Health and National Security Cess is levied on pan masala in addition to the highest Goods and Services Tax (GST) slab of 40%. Unlike traditional ad valorem taxes, this cess is imposed based on the manufacturing capacity of pan masala units. 

Despite the additional levy, the total tax incidence on pan masala products has been capped at the current level of 88%, ensuring no incremental burden beyond the existing framework.

Revenue Expectations and Fiscal Impact

According to Budget estimates, the government anticipates collecting ₹2,330 crore from this cess during the remaining two months of the current fiscal year, February and March. For the financial year 2026–27, the projected collection stands at ₹14,000 crore. 

These funds are expected to provide a stable and predictable revenue stream, reducing uncertainty associated with fluctuating indirect tax collections.

Utilisation and Sharing with States

The proceeds from the cess will be shared with states and earmarked for health awareness initiatives and other health-related schemes and activities. This approach aligns with the stated objective of channeling sin tax revenues toward mitigating the social and health costs associated with the consumption of such products.

Policy Background and GST Council Decisions

The introduction of this cess follows the cessation of the GST compensation cess mechanism. The GST Council had decided in September 2025 to levy a new cess and excise duty on pan masala and tobacco products once the compensation cess ended. 

The compensation cess, introduced in 2017 to offset state revenue losses from GST implementation, was extended until March 31, 2026, to repay ₹2.69 lakh crore in loans taken during the COVID-19 period. These loans are scheduled to be fully repaid by January 31, 2026.

Also Read: Union Budget 2026 Highlights: Your 5-Minute Guide to Fiscal, Tax and Sectoral Measures!

Conclusion

The Health and National Security Cess on pan masala marks a strategic shift in India’s indirect tax policy. By replacing the compensation cess with a targeted levy, the government aims to secure long-term funding for health and security priorities while ensuring fiscal stability and continued revenue sharing with states.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a private recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.