New cigarette and pan masala cess meant to maintain current tax levels under GST 2.0
Former CBIC Chief Vivek Johri says the Central Excise Bill 2025 and the Health Security se National Security Cess Bill 2025 are aimed at ensuring the overall tax burden on cigarettes and other tobacco products does not fall once the existing rate structure is withdrawn.
Finance Minister Nirmala Sitharaman introduced these two bills in Parliament on December 1, 2025 to revise the tax and cess framework for “sin goods” including cigarettes, pan masala, and gutkha.
These changes come at a time when the 28% GST slab on demerit goods has been replaced with a 40% rate under GST 2.0, but tobacco products had been kept out of this transition pending repayment of COVID-era compensation loans.
Johri notes that the new excise adjustments are meant to align duty levels with the 40% GST rate while keeping the effective burden broadly unchanged. For pan masala, however, the government has proposed a new, capacity-based cess that will apply uniformly based on machine speed, pouch size, and other measurable parameters.
These are edited excerpts of the interview.
Q: These two bills have come in - the Central Excise Bill 2025, as well as The Health Security se National Security Cess Bill. What should we be keeping an eye out on in terms of this and now after this comes into play, how do we see this merging with this whole GST ecosystem?
A: If you recall when GST 2.0 was introduced, and the rates were recalibrated the 28% rate, which was applicable to a large number of demerit goods, and which was effectively the demerit rate, was also done away with and instead, 40% rate was introduced.
The only exception that was made on September 22, 2025, to this rate change was that for tobacco, tobacco products and cigarettes, etc. the kicking in of the new rates was kept on hold. The reason, if you recall, was that the tenure of the compensation cess was initially to end in 2022. But because loans had been taken by the central government during COVID times when GST revenues were not doing that well, and states needed to be compensated, and those loans had to be repaid, the GST council had decided to extend the tenure of the compensation cess till 2026. The reason being that whatever revenues were raised by way of the compensation cess they were being used to repay the loans that were taken during the COVID period.
Now the loan is likely to be repaid anytime and that is why the GST council had authorised the finance minister to take a decision on when to discontinue the old rates for tobacco and tobacco products, and new rates to come in. This is a preparation for that. The sole purpose of increase in the Central Excise Amendment Bill appears to be to readjust the rates in such a way that the incidence of tax on these products does not go down and it is maintained at the current rate.
