Overhauling Tobacco and Pan Masala Taxation: Key Legislative Changes

Government Introduces New Bills to Restructure Tobacco and Pan Masala Taxation

Finance Minister Nirmala Sitharaman has introduced two significant Bills in Parliament aimed at overhauling the taxation structure for tobacco and pan masala products. These reforms are crucial as the GST Compensation Cess on such goods is nearing its end.

The Two Key Bills

Purpose: Increase excise duty on tobacco products.

Why the Amendment Is Needed:

Purpose: Introduce a new cess on pan masala manufacturing.

Key Features of the New Cess:

• 1. Central Excise (Amendment) Bill, 2025
  • The GST compensation cess on tobacco will soon be discontinued.
  • Without a replacement, the government would encounter a significant drop in tobacco-related revenue.
  • This Bill empowers the Centre to raise Central Excise Duty rates on tobacco products to maintain stable revenue collections.
• 2. Health Security & National Security Cess Bill, 2025
  • Cess imposed based on the number of machines installed or manufacturing processes used.
  • Revenue to be utilized for health-related and national security expenditures.
  • Manufacturers must self-declare all machines and processes at each factory.
  • Cess will be calculated separately for each manufacturing location.
  • The government may extend this cess to other goods through future notifications.

Background: GST Compensation Cess

What Was It? Introduced in 2017 with the launch of GST, the Compensation Cess was designed to offset revenue losses faced by states. It was originally intended for a period of five years.

The COVID-19 Impact: During 2020–21 and 2021–22:

• Cess collections fell sharply.
• The Centre borrowed funds to compensate states.
• These borrowings, along with interest, are currently being repaid.

Current Scenario

Repayments will finish in the coming months. Once repayment ends, the GST compensation cess—especially on tobacco—must legally be discontinued. This situation creates a revenue shortfall that the new Bills aim to address.

The Fiscal Logic Behind the New Bills

Without these legislative changes, ending the GST compensation cess would result in:

• Lower effective tax rates on tobacco products.
• A substantial fall in government revenue.

How the Bills Address This:

• By increasing excise duty on tobacco products to offset the removal of the cess.
• By introducing a new Health & National Security Cess on pan masala manufacturing to create an additional revenue stream.

Overall, the two Bills ensure continuity of revenue generation while strengthening systems for public health and national security funding.

Frequently Asked Questions (FAQs)

Q1. What are the main objectives of the Central Excise (Amendment) Bill, 2025?
Answer: The primary objective is to increase excise duty on tobacco products to compensate for the impending discontinuation of the GST compensation cess, ensuring stable revenue for the government.

Q2. How does the Health Security & National Security Cess Bill, 2025 function?
Answer: This Bill imposes a cess on pan masala manufacturing based on the number of machines used, with revenues directed towards health-related and national security expenditures.

Q3. Why was the GST Compensation Cess introduced?
Answer: The GST Compensation Cess was introduced to offset revenue losses faced by states following the implementation of GST, initially set for a five-year term.

Q4. What impact did COVID-19 have on cess collections?
Answer: The pandemic led to a significant decline in cess collections, prompting the Centre to borrow funds to compensate states, which are now being repaid.

Q5. What will happen after the GST compensation cess ends?
Answer: Once the cess ends, there will be a revenue shortfall, which the new Bills aim to address by increasing excise duties and introducing new cesses on specific products.

UPSC Practice MCQs

Question 1: What is the purpose of the Central Excise (Amendment) Bill, 2025?
A) To reduce excise duties on tobacco
B) To increase excise duties on tobacco
C) To eliminate taxes on pan masala
D) To introduce new GST rates
Correct Answer: B

Question 2: What does the Health Security & National Security Cess Bill, 2025 impose a cess on?
A) Tobacco production
B) Pan masala manufacturing
C) GST collections
D) State revenues
Correct Answer: B

Question 3: When was the GST Compensation Cess introduced?
A) 2015
B) 2016
C) 2017
D) 2018
Correct Answer: C