Parliament passes Bill to levy cess on pan masala manufacturing units

New Delhi: Parliament on Monday approved a Bill that seeks to impose cess on pan masala manufacturing units to augment resources for meeting expenditure on national security and public health.

Rajya Sabha returned the Health Security se National Security Cess Bill, 2025, to the Lok Sabha, which had cleared it on December 5.

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.

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.

Replying to the debate on the Bill, Finance Minister Nirmala Sitharaman said the cess is intended to serve the cost of national and health security.

"This cess aims to serve the cause of national security and also health security. It is not going to be on any essential commodities but it is going to be only on demerit goods," she stated.

Raising a dedicated stream of revenue for credible defence capability is very important, particularly in this era of hightech warfare, Sitharaman added.

Modern conflicts are dominated by precision weapons, autonomous systems, space assets and cyber operations and battlefield intelligence, all of which require a lot of capital-intensive expenditure, she stated.

"Technology being such a rapidly growing area, you also have to keep updating the technology which also requires investment that has to be for upgrading as well. I am sure all members will agree with me that in the age of technology one needs to be constantly on the top of what is the latest. We cannot compromise on this front," she said.

The country needs a steady flow of revenue for keeping the defence forces fighting fit, she said.

"So this cess actually offers a feasible mechanism to strengthen both citizens' health and military preparedness," Sitharaman said.

She noted that under the earlier GST regime, sin goods or demerit goods attracted GST, along with a compensation cess, pushing the total incidence as high as 88 per cent in some cases, and always above 40 per cent.

With the advent of next-generation GST, the compensation cess has been phased out, and GST alone now provides a cap of 40 per cent, she added.

Elaborating on the queries raised by members, Sitharaman said the Centre will also share some portion of the cess with states.

Attacking previous governments, she stated that earlier defence ministers stated in Parliament that they did not have enough money to buy equipment.

"This was the approach with which Congress went. The defence coffers were not a priority for them. Then Defence Minister AK Antony, said in Parliament - "I can't buy these equipment because I don't have the money," she added.

"In fact, during the Kargil war, soldiers were left without boots, the snow boots which are so required there… We were not even having enough ammunition to fight a 30 day or a 17 day intense warfare. So, defence was no priority of the earlier regime. But since Prime Minister Modi has come, we have absolutely kept defence as a top priority," Sitharaman noted.

She said the power to tax -- or to double the tax rate -- arises only in an emergency situation.

Accordingly, the provision for prior sanction of Parliament has been incorporated into the Act itself, she said, referring to the Health Security se National Security Cess Bill, 2025.

"So where is the discretion? Similar powers exist in other tax laws as well. This is nothing unique to this particular pan masala cess," she added.

"Even in customs duty, the duty is set at one level, but what is actually levied is often far lower. If we want to increase it, we can because Parliament authorises us to raise it up to a certain limit. If we wish to go beyond that limit, we must return to Parliament," she said.

These are well-laid-out procedures ensuring Parliamentary scrutiny.

"This law follows the same process. There is nothing discretionary, arbitrary or bypassing Parliament," Sitharaman said.

Elaborating further, she noted that no less money is being given to states as charged by certain Opposition members.

She said Rs 18.54 lakh crore was disbursed to states during UPA time under the tax devolution, while Rs 71 lakh crore has been given during 10 years of NDA.

Sitharaman stated that cesses were collected before 2014 as well.

The cesses on crude oil, the National Calamity Contingent Duty, and the Road and Infrastructure Cess all date back to before 2014, she added.

The Health and Education Cess was introduced in 2004-05, and in 2018-19, the two were merged into a combined Health and Education Cess.

For PMGSY, the allocation in 2024-25 was Rs 13,327 crore, of which only Rs 12,000 crore came from the Road and Infrastructure Cess, she stated.

Although the cess contribution was Rs 12,000 crore, Rs 13,327 crore has been disbursed to states, she said.

The states have received their share, she added.