New levy seeks to replace GST compensation cess on tobacco products, pan masala

Finance Minister Nirmala Sitharaman

The government will introduce two bills in the Lok Sabha which are likely to replace the GST compensation cess on tobacco products like cigarettes.

The government currently levies a compensation cess on top of a 28% GST on tobacco and pan masala. The compensation cess regime is set to end soon.

The Central Excise Amendment Bill, 2025, and The Health Security se National Security Cess Bill, 2025, are listed for introduction on Monday by Finance Minister Nirmala Sitharaman.

The Central Excise Amendment Bill, 20205, will  likely replace the GST compensation cess on tobacco products, sources said.

"There will be no change in the cess rates. The same cess that is currently levied under GST on these products will continue," according to sources.

The compensation cess was given an extension of four years till March 31, 2026, to repay loans that were taken to compensate states for shortfall during the COVID period. The compensation cess regime was originally planned for a period of five years and was set to expire on June 30, 2022 and was implemented to make good the revenue loss suffered by states on account of GST roll out.

The loan repayment is expected to come to an end sometime in December thereby putting an end to the compensation cess regime.

In the GST Council meeting held on September 3, 2025, it was decided to continue with the compensation cess regime on tobacco and pan masala till the loans are fully paid off.