New Levy Proposed To Replace GST Compensation Cess On Tobacco, Pan Masala
The government is set to introduce two new bills in Parliament to replace the expiring GST compensation cess on tobacco and pan masala, ensuring the current tax rates on these products remain unchanged.
Key Takeaways
- Two new bills will replace the GST compensation cess on tobacco and pan masala.
- The current cess rates will remain the same for consumers.
- The existing cess regime is ending as loan repayments to states are concluding.
New Bills to be Introduced
Finance Minister Nirmala Sitharaman is slated to introduce the Central Excise Amendment Bill, 2025 and the Health Security-cum-National Security Cess Bill, 2025 in the Lok Sabha on Monday.
Reports indicate the Central Excise Amendment Bill will directly replace the existing GST compensation cess on tobacco products like cigarettes. Officials have clarified, “There will be no change in cess rates. The same cess currently levied under the GST framework will continue.”
Why the Cess is Being Replaced
The GST compensation cess was originally introduced for five years to offset revenue losses states faced after the GST rollout. It was set to expire in June 2022 but was extended by four years until March 2026.
This extension was to facilitate repayment of loans taken to compensate states for revenue shortfalls during the COVID-19 pandemic. With loan repayments expected to conclude by December this year, the legal basis for the compensation cess is ending.
In its September 2025 meeting, the GST Council decided the compensation cess on tobacco and pan masala would continue only until these loans are fully repaid.
Currently, tobacco and pan masala attract a 28% GST plus the additional compensation cess. The new legislative framework will ensure this revenue stream continues seamlessly for the government under a different name.
