Lok Sabha passes bill to levy cess on pan masala units; Finance Minister assures states of revenue sharing

New Delhi: Finance Minister Nirmala Sitharaman on Friday said the proposed Health and National Security Cess will be levied on pan masala manufacturing units, assuring states that the revenue earned would be shared with them for expenditure on health schemes.

Replying to the debate on the Health Security se National Security Cess Bill, 2025, Finance Minister Nirmala Sitharaman said the constitutional power of levying a cess rests in Article 270, which authorises Parliament to levy a cess for a specific purpose.

The bill was later passed by voice vote in the Lok Sabha.

It seeks to augment the resources for meeting expenditure on national security and public health by levying a cess on the machines installed or other processes undertaken to manufacture pan masala and similar products.

The Finance Minister further said the Centre has provided more than what it collected from the cess in the period from 2014-15 to 2025-26.

Reeling out data transfer of funds to states, she said, Rs 6,49,459 crore in cess was transferred, while the government collected Rs 6,07,573 crore from health and education from 2014–15 to 2025–26.

The Agriculture Infrastructure and Development Cess was introduced in 2021–22, she said, adding that the government has so far transferred Rs 3,77,214 crore compared to a collection of Rs 3,87,226 crore.

Cesses as a percentage of Gross Tax Revenue (GTR), excluding the Compensation Cess, were 6.1 per cent as stated in BE 2025–26, which is lower than 7 per cent during 2010–14.

Dismissing criticism for levying one more cess, the Finance Minister said, "It is not as though in 2014 the government decided that we would levy cesses and not give funds to the states. Before 2014, four types of cesses were already being collected".

In 1974, a cess was imposed on crude oil for the creation of the Crude Oil Industry Development Fund, she said, adding that this fund was established in 2023–24.

An amount of Rs 17,730 crore and Rs 19,376 crore were provided for transfer to the Oil Industry Development Fund in RE 2024–25 and BE 2025–26, respectively, she said.

The National Calamity Contingent Duty has been collected since 2001, and the Road and Infrastructure Cess has been collected since 2000.

An amount of Rs 11.34 lakh crore was transferred during 2014–15 to 2025–26 under this cess, while the collection was Rs 11.11 lakh crore during the same period, she added.

The purpose of the bill is to create a "dedicated and predictable resource stream" for two domains of national importance -- health and national security, she said.

Sitharaman said pan masala will be taxed at the maximum 40 per cent rate under Goods and Services Tax (GST) based on its consumption, and there will be no impact of this cess on GST revenues.

The proposed Health and National Security Cess, which will be over and above the GST, will be levied on the production capacity of machines in pan masala manufacturing factories.

All expenditure from the money mobilised from the cess is subject to CAG audit, she said.

Currently, pan masala, tobacco and related products attract 28 per cent GST plus a compensation cess at a varied rate. With the end of the compensation cess levy, the GST rate will go up to 40 per cent.

Additionally, the excise duty will be levied on tobacco, and the Health and National Security Cess on pan masala.

On Wednesday, the Lok Sabha had passed a Bill, amending the Central Excise Act of 1944, to levy excise duty on tobacco, over and above the 40 per cent GST.

Stressing that the Public Health is a State subject, while National Defence is the responsibility of the central government, she said, "In today's world, where credible defence capabilities are absolutely critical, we must raise adequate resources. Modern conflicts are dominated by precision weapons, space-based assets, cyber operations, and other advanced technologies".

Sitharaman further said that there was a concern raised about how there would be a reduction in the consumption of the commodity.

"Once the GST Compensation Cess comes to an end, the effective tax incidence on pan masala, which is currently about 88 per cent - 28 per cent GST plus 60 per cent Compensation Cess - would fall sharply.

"GST Council approved the proposal to increase the GST rate to 40 per cent, which will be effective on a date to be notified. This will be done once the compensation Cess period ends," she said.

If tax incidence comes down, it will have an unintended consequence of making pan masala considerably more affordable, she said.

There was a genuine concern that this unintended outcome of greater affordability of a highly addictive and low-cost demerit good would not only compromise public-health objectives but also result in a loss of government revenue, she added.

Therefore, she said, "We cannot allow it to become cheaper and also lose revenue".