High taxation on sin goods to continue under new excise and health security cess bills

Finance Minister Nirmala Sitharaman on Monday introduced two key tax bills in the Lok Sabha aimed at repurposing levies on ‘sin goods’ such as tobacco, pan masala and related products, as the landmark GST compensation cess approaches its scheduled phaseout.

The Central Excise (Amendment) Bill, 2025 proposes a fresh excise duty on tobacco and related products, while the Health Security se National Security Cess Bill, 2025 seeks to impose an additional cess on the manufacture of pan masala and other notified goods. Both measures are designed to ensure that the total tax burden on these high-risk products remains unchanged once the compensation cess ends.

The bills were moved amid uproar in the House, with Opposition members demanding a discussion on the Election Commission's ongoing Special Intensive Revision (SIR) of electoral rolls.

TMC MP Saugata Ray opposed the introduction of the bills, arguing that while tobacco is harmful, the Central Excise (Amendment) Bill fails to acknowledge this directly. He also criticised the new health and security cess, noting that cess revenues are not shared with states, a long-standing point of contention in Centre–state fiscal relations.

Under the new excise structure, tobacco products such as cigarettes, cigars, chewing tobacco, hookah tobacco, zarda and scented tobacco would face revised duties replacing the existing GST compensation cess.

The proposed structure introduces a steep excise duty ranging from Rs 5,000 to Rs 11,000 per 1,000 sticks on cigars, cheroots and cigarettes, with rates varying by length. It also mandates a 60–70% duty on unmanufactured tobacco and a 100% duty on nicotine and inhalation products. Importantly, these levies would apply in addition to the 40% GST rate imposed on sin goods after the GST rate rationalisation, ensuring that the overall tax burden on tobacco-related products remains significantly high.

For pan masala and similar products, the new Health Security se National Security Cess would ensure continued high taxation, with proceeds earmarked for public health programmes and national security spending.

When the Goods and Services Tax was rolled out on July 1, 2017, a five-year compensation mechanism was introduced to help states adjust to revenue losses. The levy was later extended to March 31, 2026, mainly to repay loans raised by the Centre to compensate states during the Covid-induced revenue shortfall.

While the GST Council decided in September 2025 to retain the compensation cess on tobacco and pan masala until loan repayment is complete, the government is simultaneously preparing for its full discontinuation. A senior government official said India remains “on track to complete loan repayment within this fiscal,” though no specific cessation date was provided.

Cess collections on luxury goods except sin items have already ended following the recent GST rate rationalisation that simplified the structure into two slabs of 5% and 18%, with a separate 40% rate for ultra-luxury and demerit goods.

The move to reintroduce excise and levy a new cess mirrors earlier GST-era transitions where the government maintained high tax incidence on health-risk goods while simplifying the broader GST framework.

Before the rollout of GST in 2017, tobacco and pan masala were taxed through a complicated combination of central excise duties, state VAT and various surcharges, resulting in significant variation across states. With the introduction of GST, these products were placed in the highest 28% tax slab along with an additional compensation cess, ensuring their overall tax burden remained high to discourage consumption and offset revenue losses for states. After the 2025 GST rate rationalisation, which simplified the structure to two main slabs, sin goods such as tobacco and pan masala were intentionally kept outside this simplification. This allowed the government to maintain elevated taxation on these products, both to safeguard public health priorities and to secure a steady revenue stream even as the compensation cess system is phased out.

The new Bills continue this pattern by ensuring that rate rationalisation does not dilute taxation on sin goods, while also creating dedicated revenue streams for health and national security.

Both bills are expected to be taken up for debate on Tuesday. If passed, they will operationalise a new tax structure timed with the eventual cessation of the compensation cess, a major GST reform milestone that marks the winding down of a system that shaped Centre–state fiscal relations for nearly a decade.