Experts flag ambiguity risks in classification and capacity-based cess under tobacco, pan masala duty framework

Excise duty will apply on tobacco products, including cigarettes

The Central Excise (Amendment) Bill, 2025 and the Health Security se National Security Cess Bill, 2025 have raised caution among experts over potential ambiguity in product classification, valuation, and compliance obligations.

Under the bills, higher excise duty will apply on tobacco products, including cigarettes. Separately, the Health Security se National Security Cess is a machine-capacity based levy, currently proposed for pan masala manufacturing and other notified goods. Excise duty is calculated based on product category and valuation, while the cess is levied monthly on machine capacity, irrespective of actual output. Experts say distinguishing these two regimes is essential for companies to avoid misinterpretation of liability.

Classification 

Experts caution that the revised excise schedules may create interpretational challenges for tobacco products.

“Classification disputes may arise where manufacturers challenge whether revised categories or sub-categories of tobacco products… have been correctly interpreted by the authorities. Valuation issues are also expected, especially if the new rules alter how the transaction value, retail sale price, or deemed MRP is determined, creating ambiguity in assessing the correct duty liability,” Vipin Upadhyay, Partner, King Stubb & Kasiva, Advocates and Attorneys, told Moneycontrol.

Capacity-linked cess 

For pan masala, the capacity-linked Health Security Cess is calculated based on declared machine capacity rather than actual output. Experts warn that this could generate operational challenges, particularly for smaller units or seasonal producers.

“The Health Security se National Security Cess Bill, 2025 is likely to trigger significant litigation because it attempts to shift the tax base from actual production to a capacity-linked levy on machines… These areas collectively make the cess regime a fertile ground for constitutional and administrative disputes,” Abhishek A Rastogi, founder of Rastogi Chambers, told Moneycontrol.

“Capacity-based taxation is rigid and does not adjust for seasonal or fluctuating output. Small units, contract manufacturers, and job-workers may face disproportionate burdens, as their liability depends on machine capacity rather than actual production… Over time, this may consolidate the sector and bring a larger share of the market into the tax net,” Rajat Mohan, Partner, AMRG Associates added.

Compliance pressures

Experts also note that the revised excise schedules and new cesses could increase scrutiny by authorities, adding to compliance and operational burdens.

“In the revised excise framework… valuation issues may trigger litigation, particularly on whether the ‘duty price’ principle has been correctly applied,” Alay Razvi, Managing Partner, Accord Juris, told Moneycontrol.

“The imposition of a fixed monthly cess tied to declared capacity may create significant operational challenges, particularly for units with seasonal production or fluctuating utilisation rates… Companies may now be subject to stringent departmental verification of declared production capacity,” Ankit Jain, Partner, Ved Jain and Associates added.