Two Bills — 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, government sources said.
Excise duty to rise on tobacco products
According to sources, the Central Excise Amendment Bill, 2025, will increase excise duty on tobacco products such as cigarettes and other tobacco items. The higher excise duty will replace the compensation cess and ensure that the overall tax burden on tobacco consumers remains unchanged after the cess is discontinued.
The second Bill — The Health Security se National Security Cess Bill, 2025 — will apply to pan masala and similar products. The proposed law states that the cess will be levied on machines or manufacturing processes used to produce specified goods. The proceeds will be used to “augment resources for national security expenditure and public health”.
At present, tobacco and pan masala attract 28% Goods and Services Tax (GST), along with an additional compensation cess at varying rates.
Why is the compensation cess ending?
The GST compensation cess was introduced on July 1, 2017, along with the rollout of the GST framework, to compensate states for revenue losses due to the new tax system. It was initially planned for five years until June 30, 2022.
However, the levy was extended by four years until March 31, 2026, after the Centre borrowed funds to cover revenue shortfalls during the Covid-19 pandemic. The collections from the cess are currently being used to repay these loans.
Officials said the loan repayment is expected to be completed by December, after which the compensation cess will cease to exist.
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GST Council decision and impact on luxury goods
On September 3, 2025, the GST Council had decided to continue levying the compensation cess on tobacco and pan masala until the outstanding loans were fully repaid.
For other luxury and high-end items, the cess ended on September 22 following GST rate rationalisation. The tax structure was simplified to two slabs of 5% and 18%, along with a separate 40% rate for ultra-luxury goods and aerated drinks.
No change in tax burden
With the new Bills, the government aims to ensure that there is no reduction in the tax burden on sin goods such as tobacco and pan masala even after the compensation cess ends. The shift from cess to excise duty and a new security-linked levy is designed to protect government revenue without raising prices further for consumers.