India's New Taxation Framework: Replacing GST Compensation Cess with Excise Duties on Tobacco and Pan Masala

New Delhi:

Finance Minister Nirmala Sitharaman introduced two significant bills in the Lok Sabha on Monday, designed to restructure taxes on 'sin goods' including tobacco and pan masala products as the GST compensation cess on these items approaches its scheduled conclusion.

The Central Excise (Amendment) Bill aims to establish excise duties on tobacco and related products, while 'The Health Security se National Security Cess Bill, 2025' targets manufacturing of pan masala and other goods the government may subsequently designate.

These legislative proposals were introduced amid parliamentary disturbances, with Opposition members protesting and demanding discussions on the Special Intensive Revision (SIR) of electoral rolls. The bills may proceed to discussion in the House on Tuesday.

TMC representative Saugata Ray voiced opposition to both bills, noting that while tobacco is harmful, the Central Excise Amendment doesn't address this fact. Regarding the Health Security se National Security Cess Bill, Ray objected because cess proceeds are not distributed to states.

Revenue from tobacco excise duties would be included in the divisible tax revenue pool, while health and national security cess collections would fund public health initiatives and national security efforts while maintaining high taxation levels on 'sin goods'.

The Central Excise (Amendment) Bill establishes new central excise duties on tobacco products including cigarettes, chewing tobacco, cigars, hookahs, zarda, and scented tobacco, replacing the current compensation cess.

The legislation proposes excise duties on cigars, cheroots, and cigarettes ranging from Rs 5,000-11,000 per 1,000 units based on length. Additionally, it suggests 60-70 percent levies on unmanufactured tobacco and 100 percent on nicotine and inhalation products.

These levies would apply in addition to the 40 percent GST rate applicable to sin goods. Currently, tobacco and pan masala products are subject to 28 percent GST plus a compensation cess.

A government source stated, "We are on track to complete the loan repayment and end the compensation cess within this fiscal," without specifying when the cess would officially terminate.

When GST was implemented on July 1, 2017, a compensation cess mechanism was established for 5 years until June 30, 2022, to offset state revenue losses resulting from GST implementation.

This compensation cess was subsequently extended by four years until March 31, 2026, with collections being used to repay loans the Centre secured to compensate states for GST revenue losses during the Covid pandemic.

On September 3, 2025, the GST Council decided to maintain the compensation cess on tobacco and pan masala until all loans are repaid.

For other luxury items, the compensation cess ended on September 22, when GST rate rationalization was implemented with just 2 slabs of 5 and 18 percent. A 40 percent rate was established for ultra-luxury goods, aerated drinks, and other demerit goods.

The Central Excise (Amendment) Bill, 2025, and the Health Security se National Security Cess Bill, 2025 will ensure that tax burdens on sin goods like tobacco and pan masala remain consistent after the compensation cess is discontinued.