New tax coming for demerit goods like cigarettes and not for essential goods: FM Sitharaman

Finance Minister Nirmala Sitharaman on Thursday said the proposed Health and National Security Cess will be levied only on demerit goods, like pan masala, and not on essential commodities, and revenue from the levy will be shared with states for spending on health schemes.

The purpose of the Health Security se National Security Cess Bill, 2025, is to create a "dedicated and predictable resource stream" for two domains of national importance -- health and national security, Sitharaman said while moving the Bill in the Lok Sabha.

"This is a cess, and it is placed not on any essential commodity. The purpose of this Bill is to levy a cess on demerit goods, which are associated with significant health risks. We wish to impose such a cost, so that it is a deterrent, so people tend not to use it," the minister said.

Sitharaman said pan masala will be taxed at the maximum 40 per cent rate under Goods and Services Tax (GST) based on its consumption, and there will be no impact of this cess on GST revenues.

The proposed Health and National Security Cess, which will be over and above the GST, will be levied on the production capacity of machines in pan masala manufacturing factories.

 

"The cess liability will be different for every factory, depending on their production capacity," Sitharaman said.

Since GST is levied at the consumption stage, and excise duty cannot be levied on pan masala, this cess is being sought to be levied on the production capacity of pan masala units, which is a demerit good.

"Part of the revenue from this cess will be shared with states through health awareness or other health-related schemes/activities," Sitharaman pointed out.

Sitharaman said that since excise duty cannot be levied on pan masala, the government is bringing a separate cess bill to ensure that production of pan masala is taxed, along with GST, which is levied on consumption.

Currently, pan masala, tobacco and related products attract 28 per cent GST plus a compensation cess at a varied rate. With the end of the compensation cess levy, the GST rate will go up to 40 per cent.

Additionally, the excise duty will be levied on tobacco, and the Health and National Security Cess on pan masala.

On Wednesday, the Lok Sabha had passed a Bill, amending the Central Excise Act of 1944, to levy excise duty on tobacco, over and above the 40 per cent GST.

The two Bills -- the Excise bill on tobacco and the Cess bill on pan masala -- came as the GST compensation cess levy is nearing its expiry, with the loan repayment set to be over within the next few weeks.

At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.

The levy of compensation cess was later extended by 4 years till March 31, 2026, and the collection is being used to repay the Rs 2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period.

Source:: The Economic Times,  dated 04/12/2025.