Understanding the New Tobacco and Pan Masala Tax Bills of 2025

Introduction

Finance Minister Nirmala Sitharaman has recently introduced two significant Bills in Parliament aimed at restructuring the taxation framework related to tobacco and pan masala. These legislative changes are crucial as the GST compensation cess, a vital revenue source for the government, is set to be discontinued soon.

The Two New Bills

1. Central Excise (Amendment) Bill, 2025

Purpose: To increase excise duties on tobacco products.

Need for the Bill: The impending cessation of the GST compensation cess on tobacco poses a risk of substantial revenue loss for the government. This Bill empowers the Centre to elevate the Central Excise Duty rates on tobacco to sustain existing revenue levels.

2. Health Security & National Security Cess Bill, 2025

Purpose: To impose a new cess on the manufacturing of pan masala.

Key Features:

• The cess will be determined based on the number of machines installed or the manufacturing processes employed in pan masala production.
• Revenue generated will be allocated to health security and national security initiatives.
• Manufacturers are required to self-declare all machines and processes at each factory location.
• The cess will be assessed separately for every manufacturing unit.
• In the future, the government may extend this cess to cover "other goods" via notification.

Background: GST Compensation Cess

What was the compensation cess? The GST compensation cess was established in 2017 to mitigate state revenue losses following the introduction of GST. Initially, it was intended to last only for five years.

The COVID-19 Impact

During the fiscal years 2020-21 and 2021-22, the collections from the cess saw a significant decline due to the economic downturn. To support the states, the Centre borrowed funds, which are still under repayment with interest.

Current Situation

The repayment of these borrowings is nearing completion. As this occurs, the GST compensation cess, particularly on tobacco, will have to be terminated, creating a revenue gap that the two new Bills seek to address.

The Fiscal Logic Behind the Bills

Without a replacement for the GST compensation cess:

• Effective tax rates on tobacco would decline.
• The government could face a considerable revenue shortfall.

How the Bills Address This:

• Higher excise duties on tobacco will compensate for the lost revenue from the cessation of the compensation cess.
• The new cess on pan masala will establish an additional, consistent revenue stream.

In summary, these Bills are designed to ensure the government retains its revenue base while transitioning away from the GST compensation framework.

Frequently Asked Questions (FAQs)

Q1. What is the purpose of the Central Excise (Amendment) Bill, 2025?
Answer: The Bill aims to increase excise duties on tobacco products to offset revenue losses following the discontinuation of the GST compensation cess.

Q2. How will the new cess on pan masala be calculated?
Answer: The cess will be based on the number of machines and manufacturing processes used in pan masala production, with separate calculations for each manufacturing unit.

Q3. Why was the GST compensation cess created?
Answer: It was established to compensate states for revenue losses incurred after the implementation of GST, intended to last for five years.

Q4. What impact did COVID-19 have on cess collections?
Answer: The economic slowdown during the pandemic caused a significant drop in cess collections, leading the Centre to borrow funds to support state finances.

Q5. What are the expected outcomes of the new Bills?
Answer: The Bills aim to maintain government revenue by raising tobacco excise duties and introducing a new cess on pan masala, thereby filling the revenue gap left by the GST compensation cess.

UPSC Practice MCQs

Question 1: What is the main purpose of the Health Security & National Security Cess Bill, 2025?
A) To reduce tobacco taxes
B) To impose a cess on pan masala manufacturing
C) To eliminate the GST compensation cess
D) To increase GST rates
Correct Answer: B

Question 2: When was the GST compensation cess initially implemented?
A) 2015
B) 2016
C) 2017
D) 2018
Correct Answer: C

Question 3: What will happen to effective tax rates on tobacco if the GST compensation cess is discontinued?
A) They will remain the same
B) They will increase
C) They will drop
D) They will be eliminated
Correct Answer: C