National Security Cess’ – The central government is going to introduce two legislative bills in Parliament on Monday to bring in higher excise levy on tobacco and related products, and a new cess called ‘Health Security se National Security Cess’ on pan masala, as the compensation cess levied under the Goods and Services Tax (GST) regime is set to end. The legislative changes will be carried out through The Central Excise (Amendment) Bill, 2025 and The Health Security se National Security Cess Bill, 2025 The excise duty will be hiked on tobacco and related products by Centre through an amendment to the Central Excise Act, 1944 to maintain the tax incidence after the end of the GST compensation cess, while the new Health Security se National Security Cess is going to be levied on pan masala, or any other goods that the government may notify, to “augment the resources for meeting expenditure on national security and for public health”. Since defence expenditure is likely to go up, the cess levies would be used to fund national security expenses, sources said.

“…to levy a cess for the said purposes on the machines installed or other processes undertaken by which specified goods are manufactured or produced and for matters connected therewith or incidental thereto,” the list of business for Monday for Lok Sabha stated. With the new bills, there won’t be any compensation cess on tobacco and related products but a higher excise duty along with the GST rate of 40 per cent. Excise duty of 60-70 per cent is proposed to be levied on unmanufactured tobacco, tobacco refuse, while cigars and cheroots will see excise duty of 25 per cent or Rs 5,000 per thousand, whichever is higher.

Cigarettes, not having filters, and of length not over 65 millimetres will attract duty of Rs 2,700 per thousand and Rs 4,500 per thousand for length over 65 millimetres but not exceeding 70 millimetres. For filter cigarettes, the excise would be Rs 3,000 per thousand for cigarettes of length not over 65 millimetres (including the filter length of 11 millimetres), while for those over 65 millimetres but not exceeding 70 millimetres, the duty would be Rs 5,200 per thousand. The ‘Health Security se National Security’ cess on pan masala will be linked with machines installed at such manufacturing units, for which the GST officials across the country had been directed to monitor the production of pan masala at major companies’ units in the last few months, The Indian Express has learnt.

For instance, producing up to 500 pouches or tins or containers per minute for wholly or partly-machine based process, a cess of Rs 1. 01 crore will be levied (for pouches or tins up to 2.

5 grams); Rs 3. 64 crore (above 2.

5 grams but below 10 grams); Rs 8. 49 crore (for over 10 grams). The GST compensation cess levy is set to lapse after March 2026.

However, it may end sooner once the government repays the loans taken for states during the pandemic. Under GST, as per the Goods and Services Tax (Compensation to States) Act, 2017, states were guaranteed compensation at the compounded rate of 14 per cent from the base year 2015-16 for losses arising due to implementation of the taxation regime for five years since its rollout. While the five-year compensation period ended in June 2022, the government had notified the extension of the levy and collection of compensation cess till March 2026 for repayment of loans meant to compensate states for the five-year period since July 2017 rollout.

Story continues below this ad The compensation cess on tobacco and related products and pan masala continued to operate under the current system — 28 per cent GST along with the additional cess — even as hundreds of goods and services saw GST rate changes from September 22 this year under GST 2. 0. In September, after the 56th GST Council meeting, Finance Minister Nirmala Sitharaman had said, “Pan masala, cigarettes, gutkha, and other tobacco products such as chewing tobacco, products like zarda, unmanufactured tobacco and beedi will continue at their existing rates of GST and compensation cess, where applicable, until the loan and interest payment obligations under the compensation cess account are completely discharged.

” Plugging tax evasion in pan masala and gutkha businesses have been discussed many times earlier in the GST Council meetings, with even a ministerial panel set up to look into this issue. The Group of Ministers had earlier not favoured capacity-based levy and had suggested compliance and tracking measures to be taken to plug leakages/evasions; exports of such commodities to be allowed only against letter of undertaking with consequential refund of accumulated input tax credit; and had suggested compensation cess levied on such commodities to be changed from ad valorem to specific tax based levy to boost the first stage collection of the GST revenues.

On September 22, while the GST 2. 0 brought two broad slabs of 5 per cent and 18 per cent along with a special 40 per cent rate for luxury goods, it continued with the existing compensation cess levies for tobacco and related products for the purpose of loan repayment.

As per the existing system, the GST cess rate on pan masala is 0. 32 times the retail sale price (RSP) of the pan masala pouch and for pan masala, containing tobacco gutkha, it’s 0.

61 times the RSP. Chewing tobacco, filter khaini, and jarda scented tobacco attract a cess of 0.

56 times the RSP. The maximum GST cess rate for pan masala is 51 per cent of the retail sale price per unit. Story continues below this ad The maximum cess rate for tobacco is at Rs 4,170 per thousand sticks plus 290 per cent ad valorem or 100 per cent of the retail sale price per unit.

The cess is levied over and above the 28 per cent GST rate. The collections were being used for repayments of loans taken during the pandemic.

The Central government had borrowed Rs 1. 1 lakh crore in 2020-21 and Rs 1.

59 lakh crore in 2021-22 as back-to-back loans to meet a part of the shortfall in GST compensation cess collections. As per the Union Budget for 2025-26, the government expects to collect Rs 1.

67 lakh crore as compensation cess in the current fiscal, with repayment to the tune of Rs 67,500 crore for these back-to-back loans scheduled for the year. Previously, Rs 78,104 crore was paid back in 2023-24 and Rs 1.

24 lakh crore in 2024-25, as per the Budget documents.