The government has introduced
two key tax reform bills to overhaul indirect levies on tobacco products and pan masala. Finance Minister tabled The Central Excise (Amendment) Bill, 2025 and the
Health Security se National Security Cess Bill, 2025, proposing a restructuring of excise duties and cesses applied to the sector.
Under the Central Excise (Amendment) Bill, the Centre has proposed a realignment of excise duty on cigarettes, cigars and tobacco products such as gutkha. The revised duty on cigarettes will range from ₹2,700 per thousand sticks to ₹11,000 per thousand sticks. Since excise collections form part of the divisible pool, states will receive their share as per the Finance Commission formula.
However, the changes will take effect only after the Centre finishes repaying the back-to-back loans taken to compensate states for GST revenue losses during the Covid period. Once these payouts are completed, the GST rate on cigarettes, cigars and other tobacco products will be raised from the current 28% to 40%.
The second bill proposes a Health and National Security Cess specifically on pan masala, to be levied on the basis of production capacity. Unlike excise, this cess will not be shared with states; the Centre will retain and utilise the funds for the stated purposes of health and national security. The government has also retained the power to notify higher rates for the two cesses and introduce additional items under their ambit if necessary.
After repayment of Covid-related loans, the GST rate on pan masala too will rise from 28% to 40%. Producers will be required to self-declare the production capacity of each of their pan masala manufacturing units for the purpose of cess calculation.
The cess must be paid monthly, by the 7th of every month. Delayed payment will attract 15% interest along with penalties. An abatement will be allowed if machines remain shut for at least 15 days.
The bills also detail how the cess on pan masala will be computed. A factory operating a machine capable of producing 500 units of 2.5-gram pouches per minute is expected to pay around ₹100 per month per machine. The levy scales sharply with higher output or heavier packs.
For instance, if a machine has a capacity of 1,000 to 1,500 units of 2.5-gram pouches or containers per minute, the cess would rise to ₹303 lakh per month per machine. If those pouches weigh more than 2.5 grams but under 10 grams, the levy is expected to be ₹1,092 lakh per month per machine. For containers weighing above 10 grams, the cess would surge to ₹2,547 lakh per month per machine.
At present, tobacco and pan masala attract a 28% GST, along with an additional compensation cess ranging from 5% to 290%, depending on the nature and form of the product.
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