India has introduced two significant tax bills aimed at revising the excise and cess structure for tobacco, pan masala, and other so-called “sin goods.” On January 15, 2024, Finance Minister Nirmala Sitharaman presented these proposals in Parliament as part of a strategy to manage revenue losses anticipated from the phasing out of the Goods and Services Tax (GST) compensation cess next year.
The proposed legislation includes the Central Excise (Amendment) Bill, 2025, which outlines new excise duties ranging from 60 percent to 70 percent on various tobacco products. Specific duties on cigarettes will vary according to their length and whether they are filtered. Sitharaman emphasized that the new structure aims to maintain high taxation on these products to prevent any decline in government revenue once the compensation cess expires.
The GST compensation cess is an additional tax on ‘sin’ and luxury goods, implemented to offset revenue losses experienced by states following the rollout of the GST in 2017. Sitharaman stated, “Compensation cess levied on tobacco and tobacco products, wherever applicable, will be discontinued once interest payment obligations and loan liabilities under the compensation cess account are completely discharged.”
In addition to the excise bill, Sitharaman introduced the Health Security and National Security Cess Bill, 2025. This legislation proposes a new cess specifically targeting pan masala and any other goods the government may later identify. The intent is to fund health programs and national security initiatives while ensuring the price of high-risk products remains elevated after the cessation of the GST compensation cess.
The new cess will be calculated based on the declared production capacity of machines or processes involved in production rather than actual output. Sitharaman indicated that this approach is expected to enhance compliance and reduce the incidence of under-reporting among manufacturers. Both large and small producers, including those involved in handmade goods, will be required to register and remit a fixed monthly cess.
As these bills form part of a broader tax realignment strategy ahead of the termination of GST compensation provisions, they will now undergo review by parliamentary committees. A vote on the proposed legislation is anticipated in early 2025, with approval expected given the government’s current majority.
The introduction of these bills reflects India’s ongoing efforts to adapt its tax framework in response to evolving economic conditions and public health priorities.
