Sitharaman Introduces Bills to Replace GST Compensation Cess With Higher Tobacco, Pan Masala Taxes

Finance Minister Nirmala Sitharaman stunned the Lok Sabha on Monday by introducing two hard-hitting taxation bills that will lock in sky-high levies on cigarettes, chewing tobacco, vapes, and pan masala long after the temporary GST compensation cess expires in March 2026. The twin legislation — the Central Excise (Amendment) Bill, 2025 and the Health Security & National Security Cess Bill, 2025 — has been designed to ensure that every puff and every chew continues to fund the national exchequer at punishing rates while giving the Centre complete control over the revenue.

Under the Central Excise (Amendment) Bill, the government has armed itself with the power to impose excise duty ranging from ₹5,000 to a staggering ₹11,000 per thousand cigarette sticks, 60-70 per cent on unmanufactured tobacco leaves, and an eye-watering 100 per cent on modern nicotine products including e-cigarettes and heated tobacco devices. When combined with the proposed 40 per cent GST slab for sin goods, the total tax incidence on premium cigarette brands could comfortably cross 200-250 per cent of the base price, making India one of the most expensive countries in the world to smoke legally.

The second bill creates an entirely new “Health Security & National Security Cess” targeted exclusively at pan masala and gutkha manufacturers, with provisions allowing the Centre to notify any additional product for inclusion without parliamentary approval. Crucially, proceeds from this cess will flow directly into a non-lapsable fund earmarked for public health infrastructure and national security requirements, meaning states will not receive even a single rupee from this collection — a move that immediately drew fire from opposition benches.

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The urgency stems from the impending sunset of the GST compensation cess regime. Originally promised for only five years when GST was launched in 2017, the cess was extended multiple times to repay ₹2.7 lakh crore in back-to-back loans taken during the Covid-19 pandemic. With those loans scheduled for complete repayment by December 2025, the GST Council in its September meeting decided to discontinue compensation cess on luxury cars, aerated beverages, and coal, but deliberately retained it on tobacco and pan masala until a permanent alternative was legislated — exactly what Sitharaman delivered today.

Trinamool Congress MP Saugata Ray launched a sharp attack during the introduction itself, accusing the government of hypocrisy for not mentioning the proven carcinogenic nature of tobacco in the excise bill while simultaneously creating a national security cess that deprives states of revenue. Despite vociferous protests from opposition members, Lok Sabha Speaker Om Birla overruled the objections and permitted introduction, setting up an explosive stage for clause-by-clause debates in the coming week. Industry sources warn that companies may pass on the entire burden to consumers, triggering another round of steep price hikes on cigarettes and gutkha pouches from April 2026 onwards.

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