Finance Minister Nirmala Sitharaman informed the Lok Sabha on Friday that India's proposed new tax regime for tobacco is designed to capture any future variants of pan masala under a special cess. The government identifies this product category as highly susceptible to tax evasion.
Flexibility to Counter Industry Ingenuity
The proposed Health Security and National Security Cess Bill 2025 seeks to grant the government the authority to notify goods that are very similar to pan masala without needing to return to Parliament for approval each time. This measure is a direct response to the potential for manufacturers to introduce new variants by altering ingredients, branding, or formats to bypass higher taxes.
"There may be different variants of pan masala which may come up in future due to ingenuity of the industry. Those demerit goods should also be brought within the ambit of the levy," Sitharaman stated during the debate. She clarified that this power would be strictly limited to pan masala-type products and not extended to other items.
Steady Funding for Health and Defence
The new cess is set to replace the existing GST compensation cess, which is scheduled to sunset by the end of this month. The revenue generated will be exclusively earmarked for public health initiatives and national defence spending.
Sitharaman, a former defence minister, emphasized the critical need for modern defence funding. "In this day and age, where credible defence capability is absolutely critical for national defence, we need to raise resources... because modern conflicts are dominated by precision weapons, autonomous systems, space assets and cyber operations," she explained.
Regarding health funding, the minister noted that while public health is a state subject, the cess proceeds directed towards it would be provided to states. This funding would support efforts to discourage tobacco consumption, build awareness, and supplement medical requirements.
Tax Incidence to Remain Largely Unchanged
The overall tax burden on tobacco and related products is not expected to increase significantly under the new system. Currently, pan masala attracts an 88% tax, comprising a 28% GST and a 60% GST compensation cess.
Under the new regime:
- The GST component will rise to the maximum allowed ceiling of 40%.
- The compensation cess will be replaced by the proposed Health and National Security Cess.
- The combined effect will keep the total tax liability largely similar for consumers.
The Bill also retains the provision for capacity-based taxation for pan masala, where tax liability is determined on disclosed production capacity rather than actual production. It leaves scope for the government to add more items to this list in the future if required.
The Lok Sabha approved the Bill on Friday, and it will now move to the Rajya Sabha for debate. Sitharaman highlighted that the Centre's collection of cesses (excluding the GST compensation cess) is estimated at 6.1% of gross tax revenue for FY26, down from 7% in the 2010-14 period.
