Lok Sabha passes Central Excise (Amendment) Bill ahead of GST cess phaseout on ‘sin goods’
Dec 3, 2025
Synopsis
New laws are set to tax tobacco and pan masala products. These bills replace the GST compensation cess. Excise duty will be levied on tobacco items. A health and national security cess will apply to pan masala. This ensures high taxation on these goods continues. The government aims to repay loans and end the compensation cess soon.
The Lok Sabha on Wednesday passed the Central Excise (Amendment) Bill in the Lok Sabha that look to repurpose levies on 'sin goods' such as tobacco, pan masala and related products ahead of the scheduled phaseout of the GST compensation cess levied on them.
Read the Central Excise (Amendment) Bill, 2025 here
The Bill seeks to levy excise duty on tobacco and related products, while 'The Health Security se National Security Cess Bill, 2025' would be applicable on manufacturing of pan masala and other goods that the government may notify.
Which items will be taxed?
While the revenues from levy of excise on tobacco would be part of the divisible pool of tax revenues, the collection from the health and national security cess would go towards funding public health initiatives and national security while maintaining high taxation on 'sin goods'.
The Central Excise (Amendment) Bill provides for a new central excise duty on tobacco products like cigarette, chewing tobacco, cigars, hookahs, zarda, and scented tobacco, replacing the existing compensation cess.
The bill seeks to levy excise duty on cigars / cheroots / cigarettes in the range of Rs 5,000-11,000 per 1,000 sticks depending on the length. Also, it proposes levy of 60-70 per cent on unmanufactured tobacco and 100 per cent on nicotine and inhalation products.
This will be over and above the 40 per cent GST rate that would be applicable on sin goods.
Currently, tobacco and pan masala attract 28 per cent GST, plus a compensation cess.
"We are on track to complete the loan repayment and end the compensation cess within this fiscal," a government source said, without disclosing the timeline as to when the cess levy would cease to exist.
A compensation cess mechanism
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 four years till March 31, 2026, and the collection is being used to repay the loan that the Centre took to compensate states for the GST revenue loss during the Covid period.
On September 3, 2025, the GST Council had decided to continue with the compensation cess on tobacco and pan masala till the loans taken are repaid.
On other luxury items, the compensation cess ended on September 22, when the GST rate rationalisation was implemented with just 2 slabs of 5 and 18 per cent. A 40 per cent rate was fixed for ultra-luxury goods, aerated drinks and other demerit goods.
The Central Excise (Amendment) Bill, 2025, and the Health Security se National Security Cess Bill, 2025 will ensure that the tax incidence on sin goods like tobacco and pan masala remains the same after discontinuation of the compensation cess.
[The Economic Times]
