Former CBIC Chief Vivek Johri says the Central Excise Bill 2025 and the Health Security se National Security Cess Bill 2025 are aimed at ensuring the overall tax burden on cigarettes and other tobacco products does not fall once the existing rate structure is withdrawn.
Finance Minister Nirmala Sitharaman introduced these two bills in Parliament on December 1, 2025 to revise the tax and cess framework for “sin goods” including cigarettes, pan masala, and gutkha.
These changes come at a time when the 28% GST slab on demerit goods has been replaced with a 40% rate under GST 2.0, but tobacco products had been kept out of this transition pending repayment of COVID-era compensation loans.
Johri notes that the new excise adjustments are meant to align duty levels with the 40% GST rate while keeping the effective burden broadly unchanged. For pan masala, however, the government has proposed a new, capacity-based cess that will apply uniformly based on machine speed, pouch size, and other measurable parameters.
These are edited excerpts of the interview.
Q: These two bills have come in – the Central Excise Bill 2025, as well as The Health Security se National Security Cess Bill. What should we be keeping an eye out on in terms of this and now after this comes into play, how do we see this merging with this whole GST ecosystem?
A: If you recall when GST 2.0 was introduced, and the rates were recalibrated the 28% rate, which was applicable to a large number of demerit goods, and which was effectively the demerit rate, was also done away with and instead, 40% rate was introduced.
The only exception that was made on September 22, 2025, to this rate change was that for tobacco, tobacco products and cigarettes, etc. the kicking in of the new rates was kept on hold. The reason, if you recall, was that the tenure of the compensation cess was initially to end in 2022. But because loans had been taken by the central government during COVID times when GST revenues were not doing that well, and states needed to be compensated, and those loans had to be repaid, the GST council had decided to extend the tenure of the compensation cess till 2026. The reason being that whatever revenues were raised by way of the compensation cess they were being used to repay the loans that were taken during the COVID period.
Now the loan is likely to be repaid anytime and that is why the GST council had authorised the finance minister to take a decision on when to discontinue the old rates for tobacco and tobacco products, and new rates to come in. This is a preparation for that. The sole purpose of increase in the Central Excise Amendment Bill appears to be to readjust the rates in such a way that the incidence of tax on these products does not go down and it is maintained at the current rate.
So, if the 28% rate has been done away with and it’s been replaced by a 40% rate, let’s say on cigarettes, then what happens is that there used to be a compensation cess, which was a mixed rate of specific and ad valorem. There was a basic excise duty, and of course, there was a national calamity contingent duty also, which was like an excise duty. Now these are all going to be replaced by a GST rate of 40% and the basic excise duty, which will sort of more or less bring the incidence of tax to the same level as what is prevalent today. The date on which these new rates will come into effect is to be notified, but before that, the bill has to be enacted. And this is the first step which the finance minister has taken by introducing the bill in Parliament.
Q: What exactly would be the impact to the end user. It’s supposed to be net-net neutral to the end user when it comes to the cess on tobacco?
A: I have had a look at very briefly, because, the bill has just been tabled. So, I have had a look at the schedule, for example, for cigarettes. And there is some, there is some increase in the rates that have now been prescribed, but remember, these are scheduled rates. So, these are rates that will appear in law. Whether these will be the effective rates we have to wait and watch. If the objective is just to maintain the incidents where it is today, then the government could always issue a notification, and notify the effective rates below what has been prescribed now in the act.
But there is, I find, a marginal increase in the rates, at least for cigarettes. In the case of pan masala, a new cess has been introduced. Like you mentioned, for that purpose, The Health Security se National Security Cess Bill 2025 has been introduced today. That is a new levy, and that is machine based. It’s going to apply to all manufacturers of pan masala. It will be based on some two or three parameters, like the speed of the machine, the size of the pouches, and then a fixed amount has been prescribed depending on different combinations of these parameters. And so that is a new levy, which will be used by the Centre for taking care of public health and national security.
Q: I just wanted one clarification from the company’s standpoint, where the manufacturers would be involved, where the cess is expected to be on the production capacity and not on the sale. So, would it be on the utilisation of the manufacturing capacity that you have say, for example, it’s 80% of the 100% that you have used, or is it going to be on the entire production capacity that you have, irrespective of how much you are utilising?
A: It’s a normative levy, so it’s going to be on the production capacity, not on the actual production. I have quickly been through the bill and the only caveat I would like to put in is that – few machines, or a machine, is not used, at least for a period of 15 days or more, then there is a provision to give an abatement for that particular period.
But otherwise, the rates that have been prescribed are dependent purely on the size of the pouch, what is the weight of the pouch, what is the speed of the machine? These are the two major parameters on the basis of it. So it’s actually a capacity based levy, not on the actual production or sale of pan masala.
Q: So, the revenue in terms for the central and state government, with these excise duty hike will remain same or do you think there is a possibility of an increase, given that excise duty hike number that has come in for the cigarette side, at least it’s a bit higher, like you were mentioning.
A: Remember that excise is also a duty that goes into the shareable pool. So, it’s as per the devolution formula prescribed by the Finance Commission, excise duty revenues are shared between the centre and the states. And GST, of course, gets split, between the centre and the states.
It’s only the cess on pan masala, which is going to be used by the Union, which is the centre and but the other two taxes will continue to be shared as they are being now. I don’t think it will adversely impact the revenues of the state governments, if that is what your question is.
