Key Highlights:
- Finance Minister Nirmala Sitharaman introduced two tax bills on December 1, 2025, targeting tobacco and pan masala as GST compensation cess ends
- Central Excise (Amendment) Bill 2025 proposes excise duty ranging from Rs 2,700 to Rs 11,000 per thousand cigarettes, replacing existing cess structure
- Health Security se National Security Cess Bill 2025 introduces machine-based levy on pan masala, with monthly cess reaching Rs 25.47 crore for high-capacity machines
Opening Overview
New bills tobacco pan masala taxation emerged as a critical policy move when Finance Minister Nirmala Sitharaman tabled two landmark legislations in the Lok Sabha on December 1, 2025. The Central Excise (Amendment) Bill 2025 and the Health Security se National Security Cess Bill 2025 represent a comprehensive overhaul of India’s sin goods taxation framework as the GST compensation cess nears its scheduled termination. These new bills tobacco pan masala regulations aim to maintain current tax incidence levels on tobacco products and pan masala while creating a permanent revenue structure beyond the temporary compensation cess mechanism.
The introduction of these new bills tobacco pan masala measures comes as the Centre prepares to complete loan repayments taken during the Covid-19 pandemic to compensate states for GST revenue shortfalls. With the GST Council’s September 2025 decision to phase out compensation cess once back-to-back loans are discharged, expected by December 2025, the government needed alternative taxation mechanisms to prevent revenue loss. The new bills tobacco pan masala framework ensures that sin goods continue bearing high tax burdens while directing revenues toward public health and national security objectives.
🚨 BIG BREAKING 🚨
— CA Himank Singla (@CAHimankSingla) November 30, 2025
Finance Minister to table the Health Security & National Security Cess Bill 2025 and Central Excise (Amendment) Bill 2025 in Lok Sabha tomorrow.
🔹 Cess on pan masala & gutkha to be levied under the new Bill
🔹 Cigarettes cess to be introduced via amendment to… pic.twitter.com/stfZxWSkQI
Transformation of Tobacco Taxation Framework
New excise duty structure replaces GST compensation cess:
- Filter cigarettes above 75mm length will attract Rs 11,000 per thousand sticks, up from Rs 735 under existing excise rates
- Non-filter cigarettes (65-70mm) face Rs 4,500 per thousand sticks, an 18-fold increase from Rs 250
- Unmanufactured tobacco duty rises from 64% to 70% under the proposed amendments
The Central Excise (Amendment) Bill 2025 fundamentally restructures new bills tobacco pan masala taxation by proposing substantial excise duty increases across all tobacco categories. For cigarettes, the new bills tobacco pan masala legislation introduces a tiered system where duty rates vary based on cigarette length, ranging from Rs 2,700 per thousand sticks for the shortest category to Rs 11,000 for filter cigarettes exceeding 75mm. Chewing tobacco will see duty escalate from 25% to 100%, while hookah or gudaku tobacco increases from 25% to 40%. The smoking mixtures for pipes and cigarettes face the sharpest hike, jumping from 60% to 325%.
These new bills tobacco pan masala revisions aim to maintain tax incidence at current levels once the compensation cess discontinues. Currently, tobacco products attract 28% GST plus compensation cess, but under GST 2.0 implemented on September 22, 2025, tobacco will fall under the 40% special rate category. The enhanced central excise duties under new bills tobacco pan masala legislation will combine with this 40% GST rate to preserve overall tax burden. According to the statement of objects and reasons accompanying the new bills tobacco pan masala legislation, the amendments seek “to give the government the fiscal space to increase the rate of central excise duty on tobacco and tobacco products so as to protect tax incidence”.
The new bills tobacco pan masala approach differs significantly from compensation cess in revenue distribution, as central excise collections become part of the divisible pool shared with states, unlike cess proceeds which remain exclusively with the Centre. This structural change in new bills tobacco pan masala taxation addresses state concerns about revenue sharing while maintaining deterrent pricing on harmful products. The bill’s passage will establish a permanent excise framework under the Central Excise Act, 1944, replacing the temporary compensation cess mechanism scheduled to lapse after March 31, 2026.
Revolutionary Machine-Based Cess on Pan Masala
Capacity-linked taxation replaces production-based assessment:
- Rs 1.01 crore monthly cess per machine for speeds up to 500 pouches per minute with pouches weighing up to 2.5 grams
- Rs 25.47 crore monthly cess for machines operating between 1,001-1,500 pouches per minute with pouches exceeding 10 grams
- Rs 11 lakh fixed monthly cess for wholly manual production facilities
The Health Security se National Security Cess Bill 2025 introduces an innovative dimension to new bills tobacco pan masala regulation by implementing machine-based taxation for pan masala manufacturing. This new bills tobacco pan masala provision levies cess based on installed machine capacity and maximum rated speed rather than actual production volumes, fundamentally altering the compliance framework. The capacity-linked system under new bills tobacco pan masala legislation aims to eliminate tax leakages arising from under-reporting and opaque manufacturing practices that have long plagued pan masala taxation.
Under the new bills tobacco pan masala cess structure, manufacturers must self-assess payable amounts based on declared machine specifications and furnish monthly returns. The cess calculation considers both machine speed (pouches per minute) and pouch weight, creating a matrix with rates escalating significantly for high-capacity operations. For instance, machines with maximum rated speeds between 501-700 pouches per minute producing pouches weighing 5.1-7.5 grams would face substantially higher monthly cess than lower-capacity equipment. The new bills tobacco pan masala Bill grants the government authority to increase cess rates up to twice the specified amounts if deemed necessary in public interest.
The new bills tobacco pan masala legislation mandates that persons owning or controlling machines or processes must register and declare all production capacity at each facility. Failure to declare machines, non-payment of cess within specified periods, or tampering with seized goods constitutes offences under new bills tobacco pan masala regulations, attracting penalties of Rs 10,000 or the evaded cess amount, whichever is higher.
For serious violations involving fraud or evasion exceeding Rs 1 crore, the new bills tobacco pan masala framework provides for criminal prosecution with imprisonment between one to five years, fine, or both. Officers of Joint Commissioner rank or above receive powers under new bills tobacco pan masala provisions to inspect manufacturing premises, search facilities, and seize goods, machines, or documents where evasion is suspected.
Revenue Allocation and Policy Objectives
Proceeds directed toward public health and national security:
- Health Security se National Security Cess collections fund public health initiatives and defense requirements
- Central excise revenues on tobacco enter divisible pool, ensuring states receive constitutional share
- Maintains high taxation on sin goods while creating sustainable long-term revenue framework
The new bills tobacco pan masala legislation establishes distinct revenue allocation pathways for the two levy types, reflecting different policy priorities. Collections from the Health Security se National Security Cess will be specifically earmarked for expenditure toward public health and national security, directly linking sin goods taxation to health interventions and defense capabilities. This new bills tobacco pan masala mechanism creates a dedicated funding stream for government priorities while maintaining punitive taxation on products with negative health externalities.
In contrast, the enhanced central excise duties on tobacco under new bills tobacco pan masala amendments become part of the consolidated fund and are subject to constitutional revenue-sharing arrangements with states. This represents a significant departure from the compensation cess model, where collections remained entirely with the Centre for specified purposes. The new bills tobacco pan masala structure addresses federalism concerns raised by state governments and opposition parties who argued that cess mechanisms bypass constitutional revenue distribution norms.
TMC member Saugata Ray opposed the new bills tobacco pan masala introduction in the Lok Sabha, citing concerns that cess proceeds are not shared with states despite tobacco’s harmful nature being well-established. However, government sources emphasized that the new bills tobacco pan masala framework maintains revenue neutrality by preserving existing tax incidence levels while transitioning to a permanent legislative structure. The GST Council’s September 3, 2025 decision to continue compensation cess on tobacco and pan masala until loan repayment completion set the stage for new bills tobacco pan masala legislation, with the 54th GST Council meeting estimating that all compensation-related liabilities would be discharged by December 2025.
Implementation Timeline and Compliance Framework
Phased transition from compensation cess to new levy structure:
- GST compensation cess on tobacco and pan masala continues until Centre completes Covid-era loan repayment
- New excise and cess framework becomes operational once compensation cess is formally discontinued
- Three-tier appeal mechanism provides resolution pathway for disputes under Health Security se National Security Cess
The new bills tobacco pan masala legislation was introduced amid parliamentary din on December 1, 2025, as opposition members protested demanding discussion on electoral roll revisions. Despite procedural challenges, the new bills tobacco pan masala proposals were tabled and may be taken up for detailed discussion and passage in subsequent Lok Sabha sessions. Once enacted, the new bills tobacco pan masala framework will replace the GST compensation cess structure that has operated since July 1, 2017.
The GST compensation cess was originally conceived as a five-year mechanism to offset state revenue losses from GST implementation, with protection guaranteed at 14% compounded annual growth from the 2015-16 base year. When the five-year period ended in June 2022, the levy was extended until March 31, 2026, specifically to retire debt obligations the Centre incurred when compensating states during pandemic-induced revenue shortfalls. The 56th GST Council in September 2025 empowered Finance Minister Sitharaman to determine the exact date for ending compensation cess once loan repayment is complete, with December 2025 projected as the likely timeline.
The new bills tobacco pan masala legislation provides comprehensive compliance and dispute resolution mechanisms to ensure smooth implementation. The Health Security se National Security Cess Bill establishes a three-tier appeal process where aggrieved manufacturers can first appeal to an authority not below Commissioner rank within three months of an adverse order. Further appeals can be filed before the Customs, Excise, and Services Tax Appellate Tribunal, with substantial questions of law appealable to High Courts. The new bills tobacco pan masala framework includes provisions for audits by officers of Commissioner rank or above to verify cess payment correctness, with authority to initiate recovery proceedings for discrepancies.
Final Perspective
The new bills tobacco pan masala legislation represents a watershed moment in India’s indirect taxation policy, transitioning sin goods taxation from temporary cess mechanisms to permanent excise and capacity-based frameworks. By maintaining tax incidence at current levels while restructuring levy architecture, the new bills tobacco pan masala measures ensure revenue continuity for both Centre and states as the GST compensation cess concludes its extended tenure. The introduction of machine-based taxation for pan masala addresses longstanding enforcement challenges and revenue leakages that production-based assessments failed to prevent.
Industry observers note that the new bills tobacco pan masala proposals align with long-term public health objectives by making harmful products less accessible through sustained high pricing. Tax Partner Saurabh Agarwal of EY India emphasized that while the new bills tobacco pan masala framework supports health goals, the industry must urgently assess pricing and supply chain implications of this comprehensive overhaul. The enhanced duties on cigarettes, ranging from Rs 2,700 to Rs 11,000 per thousand sticks, represent some of the steepest excise increases in recent Indian tax history.
The new bills tobacco pan masala legislation also establishes precedent for capacity-based taxation that could potentially extend to other goods the government may notify under the Health Security se National Security Cess framework. With parliamentary approval anticipated in coming weeks, the new bills tobacco pan masala measures will complete India’s transition to GST 2.0 while preserving deterrent taxation on products with negative health consequences. The earmarking of cess proceeds for public health and national security creates direct linkages between sin goods revenue and expenditure addressing the societal costs these products impose.
