The government plans to replace the GST compensation cess with a new Health and National Security Cess, which will mainly apply to tobacco and pan masala products. An tax expert said the overall tax impact on consumers is expected to stay largely unchanged, but the purpose and structure of the levy are shifting.
The change ends uncertainty over taxes on tobacco products after the end of the compensation cess regime. He said the new label linking the cess to both health and defence funding is noteworthy. “This can possibly be linked to the fact that… the defence ministry requested for an allocation of 20% more for defense purposes in the budget,” he said. He expects the cess to generate significant revenue to support healthcare costs linked to tobacco and national security spending.
A major change in the cess design is that it will be based on production capacity rather than actual output. “When something gets levied on the production capacity… the manufacturer has no option but to pay the tax… on the estimated production capacity,” He explained. For tobacco companies, the levy would apply even if production runs below full capacity. Any claim for lower tax would require approval from the authorities.
However, the revision does not simplify the already layered tax structure. He noted that companies will continue dealing with GST, central excise duty and now the new cess. “The expectation… that some simplification can be attempted here also… has not been met,” he said.
On the broader fiscal picture, He pointed out that revenue from the new cess will go entirely to the Centre at a time when tax collection growth is behind target. From April to October, the increase stood at 4.5% against a near 11% goal. He remains hopeful that consumption strength could support growth in GST collections. He said upcoming data will indicate whether improved demand, especially in high-tax categories like automobiles, can make up for the recent rate cuts.
