Central Excise Amendment Bill 2025: How the new tax plan could impact tobacco and pan masala prices

The Central Excise Amendment Bill, 2025, will replace the GST compensation Cess, which is currently levied on all tobacco products like cigarettes, chewing tobacco, cigars, hookahs, zarda, and scented tobacco.

The Union government is set to overhaul the taxation structure for tobacco and pan masala with the introduction of two key bills in the Lok Sabha on Monday, the Central Excise Amendment Bill, 2025, and the Health Security se National Security Cess Bill, 2025. The move comes ahead of the expiry of the GST compensation cess and is aimed at keeping the overall tax burden on these products unchanged.

The winter session of Parliament, which begins on 1 December and runs until 19 December, will have 15 sittings across 19 days. Both bills will be introduced by Finance Minister Nirmala Sitharaman.

Why is a new excise duty needed?

Tobacco products such as cigarettes, cigars, hookah tobacco, chewing tobacco, zarda and scented tobacco currently attract 28 per cent GST plus a hefty compensation cess that varies by product and, in some cases, goes as high as 290 per cent. This cess was originally introduced in 2017 to compensate states for GST-related revenue loss and was extended until March 2026 to help repay loans taken during the Covid-19 period.

With loan repayments expected to be completed by December, the compensation cess will cease. To prevent a sudden fall in tax incidence on tobacco, the government plans to replace the cess with a new central excise duty. The Bill seeks “to give the government the fiscal space to increase the rate of central excise duty on tobacco and tobacco products so as to protect tax incidence,” according to the statement of objects and reasons, as quoted by PTI.

The change aligns with the GST Council’s September decision to discontinue the compensation cess on all goods except tobacco and transition to a two-rate GST structure while reserving a 40 per cent slab for ultra-luxury and sin goods.

What will change under the new law?

If enacted, the Central Excise Amendment Bill, 2025 will replace the GST compensation cess on tobacco with a central excise duty, allow the Centre to revise excise rates to match current total taxation levels, ensure revenue neutrality by keeping the tax burden on sin goods unchanged, create a permanent taxation structure instead of a temporary cess, and maintain tobacco under the highest GST bracket of 40 per cent once the rationalised slabs take effect.

The new Cess Bill: What is the Health Security se National Security Cess?

Alongside the excise amendment, the government will introduce the Health Security se National Security Cess Bill, 2025, which proposes an additional cess on pan masala and any other specified goods notified later.

Key provisions include that the cess is levied in addition to GST and any other tax, it will apply based on machine capacity rather than actual production output, manufacturers must file a self-declaration of all machines at each factory or premises, and cess collection aims to support targeted spending on public health and national security.

A draft reviewed by Bloomberg shows the government proposes levies of Rs 5,200 per thousand sticks of cigarettes (65–70 mm) and Rs 7,000 per thousand sticks (70–75 mm).

What happens once both Bills are passed?

The two Bills together will ensure the total tax incidence on tobacco and pan masala remains unchanged, replace the compensation cess on tobacco with a permanent excise duty, introduce a new machine-capacity-based cess on pan masala to bolster public health and security funding, prevent revenue loss to the Centre once the compensation cess ends, and shift sin goods into a stable long-term tax framework.

• The Bills will formally end the GST compensation cess on tobacco products such as cigarettes, cigars, chewing tobacco and zarda.

• The Centre will gain authority to impose and revise a new central excise duty on tobacco under the amended Central Excise Act, 1944.

• The aim is to keep the overall tax incidence on tobacco, currently a mix of GST and compensation cess, at the same high level even after the cess expires.

• Alongside this, the Health Security se National Security Cess Bill, 2025 will introduce an additional cess on pan masala and other specified goods.

• This cess will create a steady revenue stream for public health and national security spending, replacing the temporary COVID-era compensation mechanism.

• Together, the Bills establish a permanent taxation framework for “sin goods,” ensuring the government does not lose revenue once the compensation cess regime ends.

The Opposition is expected to demand a discussion on the Election Commission’s ongoing Special Intensive Revision of electoral rolls, adding political heat as the Bills are tabled.