Najib Shah, Former Chairman of the Central Board of Indirect Taxes and Customs (CBIC), has warned that the government’s plan to tax tobacco and pan masala based on the number of machines installed could lead to major enforcement challenges, similar to those seen before the goods and services tax (GST) era.
Finance Minister Nirmala Sitharaman introduced two bills in Parliament on December 1, 2025, to overhaul the tax and cess structure for “sin goods” such as cigarettes, pan masala and gutkha. The changes come as the 28% GST slab on demerit goods transitions to a 40% rate under GST 2.0, although tobacco products had been kept outside this shift until COVID-era compensation loans were fully repaid.
Shah said that while technology is more advanced today, a machine-based tax system still requires frequent factory inspections and heavy monitoring—conditions that had previously resulted in “great enforcement challenges.” He stressed that this is a crucial concern because it raises doubts about whether the new system can deliver the intended revenue without repeating the leakages seen under the old regime.
He also noted that the steep tax rates proposed in the amendments were expected after the GST Council indicated that higher levies would follow the end of the compensation cess period. While the amendment sets out maximum rates, Shah believes the actual rates could be “a little lesser” since the proposed levels are significantly higher than current duties. The inclusion of a specific tax component along with a per-machine levy, he added, makes the structure riskier.
Adding to the discussion, an tax expert said the government’s intent is clear: to tax “sin goods as high as possible.” He pointed out that the new Health Security and National Security cesses will be retained entirely by the Centre, which could leave states feeling short-changed since they agreed to include these products under GST on the understanding that revenues would be shared. Still, he noted that the Centre may allocate funds to states when needed because the money will sit in the Consolidated Fund of India.
He said the new cesses will raise both excise duty and the effective GST burden on tobacco products, increasing costs across the supply chain. He also highlighted potential complications for leasing companies and importers, saying these transitional issues must be resolved to avoid leakages.
Both emphasised that the government must put in strong safeguards as the compensation cess phase-out coincides with the rollout of the new tax regime. Without careful planning, they cautioned, the enforcement problems and revenue leakages that once plagued the earlier system could reappear.
