Lok Sabha Passes Bills for New Tax on Tobacco: Excise Duty and Health-Security Cess to Replace GST Cess

The Lok Sabha has passed two critical bills—the Central Excise (Amendment) Bill, 2025, and the Health and National Security Cess Bill, 2025—to introduce a revised tax structure on ‘sin goods’ like tobacco, cigarettes, and pan masala. This move is aimed at replacing the GST compensation cess, which is scheduled to be phased out by March 31, 2026.

Lok Sabha Passes Bills for New Tax on Tobacco: Excise Duty and Health-Security Cess to Replace GST Cess

Objective of the Reform

The new taxation regime has dual goals:

1. Revenue Continuity: To ensure that the high level of revenue generated from these demerit goods continues after the GST compensation cess is withdrawn.
2. Targeted Spending: To shift the revenue focus toward specific public health and national security expenditures. The revenue from the new cess will not be shared with states (as it is outside the divisible tax pool).
3. Fiscal Discipline: To help repay the COVID-19 pandemic-related loans taken by the Centre to compensate states.

New Tax Structure Proposals

1. Central Excise (Amendment) Bill, 2025:
   • This bill introduces a fresh central excise duty on all tobacco products, which will be in addition to the existing 40% GST rate.
   • Cigarette Duty: ₹5,000–₹11,000 per 1,000 sticks, depending on length.
   • Unmanufactured Tobacco: 60–70% duty.
   • Nicotine Products: 100% excise duty on nicotine and inhalation products.
2. Health and National Security Cess Bill, 2025:
   • Introduces a dedicated cess on pan masala and other notified products.
   • Proceeds from this cess will be specifically utilized for funding public health programmes and national security.

Background: GST Compensation Cess

The GST compensation cess was introduced in 2017 to compensate states for revenue losses due to the GST rollout. Although initially planned for five years, it was extended till March 31, 2026, to cover the loan repayment liabilities incurred during the pandemic.

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Question & Answer

Q1. Which two specific bills were passed by the Lok Sabha to introduce a revised tax structure on tobacco and pan masala?
A) GST Amendment Bill and Finance Bill
B) Central Excise (Amendment) Bill and Health and National Security Cess Bill
C) Tobacco Control Bill and Sin Goods Levy Bill
D) Direct Tax Code Bill and State Compensation Bill
Answer: B) Central Excise (Amendment) Bill and Health and National Security Cess Bill

Q2. The new tax structure is primarily intended to replace the revenue generated by which cess, which is being phased out?
A) Customs Duty
B) Income Tax Surcharge
C) Infrastructure Cess
D) GST Compensation Cess
Answer: D) GST Compensation Cess

Q3. The GST Compensation Cess is scheduled to be phased out by which date?
A) June 30, 2022
B) December 31, 2025
C) March 31, 2026
D) July 1, 2027
Answer: C) March 31, 2026

Q4. The Central Excise (Amendment) Bill, 2025, proposes what duty rate on nicotine and inhalation products?
A) 40%
B) 60%
C) 70%
D) 100%
Answer: D) 100%

Q5. The revenue generated from the new Health and National Security Cess will be used for which primary purpose?
A) Shared equally with all States in the divisible pool.
B) Repaying loans and funding public health and national security.
C) Funding core infrastructure projects only.
D) Reducing the cost of essential medicines.
Answer: B) Repaying loans and funding public health and national security.

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