Govt to Replace Compensation Cess with Higher Central Excise Duty on Tobacco
Finance Minister Nirmala Sitharaman will introduce legislation on Monday to replace the GST Compensation Cess with a new central excise duty of 70% or higher on tobacco products, aiming to safeguard government revenues.
Key Changes
- Tobacco products to face 70% cess plus 40% GST
- Cigarettes to have specific cess of ₹2,700-₹11,000 per thousand sticks
- New Health Security and National Security Cess proposed for pan masala
The Central Excise (Amendment) Bill, 2025 will be introduced in the Lok Sabha to replace the existing GST Compensation Cess on tobacco and related products. This move comes as the Compensation Cess is set to be phased out once all outstanding payments and loan liabilities are settled.
According to the government’s statement, the amendment aims to provide fiscal space to maintain the historically high tax burden on tobacco products and “protect the tax incidence.”
New Tax Structure
Under the proposed changes, tobacco and related products will attract a 70% cess in addition to the 40% GST rate. For cigarettes, the cess will be specific rather than ad-valorem, ranging from ₹2,700 to ₹11,000 per thousand sticks based on their length.
This maintains the government’s policy of high taxation on sin goods, which were recently moved to the 40% GST slab while retaining the earlier cess structure.
Separate Health and Security Cess
In a related development, the Finance Minister will also introduce the Health Security and National Security Cess Bill, 2025. This legislation proposes a new cess on pan masala and potentially other products to be notified later.
Unlike traditional taxes, this cess will be linked to the production capacity of manufacturing machinery rather than the volume of goods produced. The revenue generated will be used for national security and public health expenditures after parliamentary approval.
The proceeds from both cess measures will be credited to the Consolidated Fund of India before being allocated for specific purposes.
