Central Excise Amendment Bill Introduced
The Central Excise (Amendment) Bill, 2025, has been introduced in Parliament, signaling a major overhaul in how tobacco and related products are taxed in India. This legislative move is a direct response to the approaching end of the temporary Goods and Services Tax (GST) Compensation Cess, which was originally put in place to help states cover revenue losses after the nationwide GST rollout in 2017.
The primary objective of this new Bill is to ensure that the overall tax burden on these “sin goods” does not suddenly decrease when the Compensation Cess is phased out. A sharp fall in prices for these products could lead to a rise in consumption, which would go against the government’s public health goals. By amending the Central Excise Act, 1944, the government is creating the legal room to raise the central excise duty on tobacco items.
This change means the existing GST Compensation Cess on products like cigarettes, chewing tobacco, and hookahs will be replaced by a new, higher central excise duty. This new duty, combined with the recently adjusted 40% GST rate for sin goods, is intended to maintain the current, high level of taxation. For consumers, this shift is designed to be revenue-neutral, meaning the prices of these products are unlikely to see an immediate drop.
Alongside this, a related but separate legislation, the Health Security se National Security Cess Bill, 2025, was also introduced. This new Cess will specifically target the manufacturing of pan masala and other notified goods. A key administrative feature of this is that the levy will be calculated based on the production capacity of the machinery used in the factory, rather than the final output quantity. This novel approach is meant to curb tax evasion, which has been a persistent problem in this sector.
The revenue collected through this Health and National Security Cess is intended to be earmarked for two specific and crucial national priorities: bolstering public health initiatives and augmenting resources for national security expenditure. This separation ensures a dedicated funding stream for these critical areas.
For the states, this tax reform carries a mixed financial impact. The revenue collected from the new central excise duty on tobacco will be part of the Union’s divisible pool and thus shared with the states. However, the proceeds from the new Health Security se National Security Cess, like other cesses, will go directly to the Centre’s Consolidated Fund and will not be shared with the states, a point that has seen some opposition and debate within Parliament.
In essence, these Bills represent a carefully planned tax architecture for the post-GST Cess era. The government is aiming for a stable, high-tax regime for harmful products, safeguarding both its public health objectives and its revenue streams as the older, temporary compensation framework officially expires. This new structure is expected to lead to greater predictability and stronger compliance from manufacturers in the affected industries.
