New levies to keep ‘sin goods’ price high

New Delhi: The Union government plans to impose new levies on ‘sin goods’ such as cigarettes, gutkha and pan masala, which will keep the prices of these demerit items high, as the current structure of compensation cess is likely to be discontinued by March 2026.

Finance Minister Nirmala Sitharaman is scheduled to introduce two new bills in the Lok Sabha on Monday that will be aimed at imposing new tax/cess on demerit goods. The proposed bills are — The Central Excise Amendment Bill, 2025, and The Health Security se National Security Cess Bill, 2025.

The Central Excise Amendment Bill, 2025, seeks to replace the GST compensation cess on tobacco products with an excise duty.

With the introduction of the GST in July 2017, the main tax rates on tobacco and tobacco products came down substantially. However, the government imposed additional levy in the form of compensation cess. As a result, the prices of these items remained elevated.

Initially, the cess was introduced for five years to compensate the states for any revenue shortfall. As per the terms of the introduction of the GST regime, states were guaranteed 14% annual growth in tax revenue for five years beginning from July 2017. However, the cess was extended till March 2026 to repay loans taken by the Union government to support states during the revenue shortfall caused by the Covid pandemic.

“Compensation cess levied on tobacco and tobacco products, wherever applicable, will be discontinued once interest payment obligations and loan liabilities under the compensation cess account are completely discharged,” the Union finance minister noted in the ‘statement of objects and reasons’ of the proposed Central Excise (Amendment) Bill, 2025.

In order 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, it is imperative to amend the table in Section IV of the Fourth Schedule to the said Act (Central Goods and Services Tax Act, 2017), the minister stated.

The ‘Health Security se National Security Cess’ Bill will replace the compensation cess on pan masala. Through this, the government seeks to “augment the resources for meeting expenditure on national security and for public health”.

It will “levy a cess for the said purposes on the machines installed or other processes undertaken by which specified goods are manufactured or produced”.

At present, tobacco products, including cigarettes, pan masala, gutkha, and chewing tobacco, attract 28% GST, along with excise duty, National Calamity Contingent Duty (NCCD), and compensation cess.

In the 56th GST council meeting held in September it was proposed to bring these items under the higher tax slab of 40%. However, the proposal is not yet officially notified.