Parliament Winter Session: Govt to bring two bills in Lok Sabha to replace GST cess on tobacco, pan masala with new levies

The government will introduce two bills in the Lok Sabha on Monday, December 1, 2025, imposing excise duty on tobacco and tobacco products and imposing a new restriction on pan masala manufacturing.

The Central Excise Duty Amendment Bill, 2025 will replace Cess, the GST compensation currently levied on all tobacco products such as cigarettes, chewing tobacco, cigars, hookah, zarda and scented tobacco.

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The Central Excise (Amendment) Bill, 2025 aims to “provide fiscal space to the government to increase the rate of central excise duty on tobacco and tobacco products to safeguard tax events” after the GST compensation Cess ends, according to the bill’s objects and rationale.

The Health Security and National Security Tax Bill, 2025 aims to tax Cess on the production of certain goods like pan masala.

The government may notify other goods on the production of which such a tax may be applicable.

Sin goods such as tobacco and pan masala currently attract a 28% GST in addition to a compensation cess levied at various rates.

Once the Compensation Duty ends, sales of tobacco and related products will be subject to GST plus excise duty, while pan masala will be subject to GST plus Health Safety and National Security Duty.

Since the 28 per cent GST rate has been abolished, such sinful goods will be subject to the highest GST slab of 40 per cent.

According to the purpose and justifications of the bill, “It is proposed to tax the Health Security and National Security Tax in order to contribute to the twin objectives of ensuring targeted use for public health as well as national security.”

This exemption will apply in addition to any other duties or taxes imposed on specified goods under any applicable law, the statement said.

Such businesses will be required to submit a self-declaration of all machinery or processes for each factory or facility and the deduction for each such location will be calculated on an aggregate basis, it said.

The two bills have been listed for introduction by Finance Minister Nirmala Sitharaman on Monday.

On July 1, 2017, when the GST was implemented, a compensation deduction mechanism was put in place for 5 years until June 30, 2022, in order to compensate for the revenue losses suffered by the states due to the implementation of the GST.

The compensation cess was later extended for four years till March 31, 2026, and the collection is being used to repay the loan taken by the Center to compensate states for GST revenue loss during the Covid period.

Since this loan repayment will be fully repaid in December, the compensation deduction will end.

On September 3, 2025, the GST Council had decided to continue the compensation deduction on tobacco and pan masala until the loans taken are repaid.

For other luxury goods, the compensation cut ended on September 22, when the rationalization of the GST rate was implemented with only two slabs of 5 per cent and 18 per cent. A rate of 40 percent was set for ultra-luxury goods, carbonated drinks and other disadvantaged goods.

The Central Excise Duty Amendment Bill, 2025 and the Health Security and National Security Duty Bill, 2025 will ensure that the tax rate on sin goods such as tobacco and pan masala remains the same after the removal of compensation Tax.