The government is set to replace the Compensation Cess with a new levy of 70% or higher on tobacco and tobacco products. Finance Minister Nirmala Sitharaman will introduce the Central Excise (Amendment) Bill, 2025 in the Lok Sabha on Monday to replace the existing GST Compensation Cess currently imposed on these products.
The move is aimed at safeguarding tax revenues once the Compensation Cess is phased out.
According to the Statement of Objects and Reasons, the Compensation Cess on tobacco and related products will be discontinued after all interest payments and loan liabilities under the cess account are fully settled. The amendment is intended to provide the government fiscal space to increase central excise duty on tobacco to “protect the tax incidence.”
The proposed overhaul reflects the government’s intent to maintain the historically high tax burden on tobacco. Tobacco, cigarettes and related items were taxed at 28% GST, plus a compensation cess of 5–290%. GST rates were recently revised and sin goods — including tobacco, cigarettes and pan masala — were moved into the 40% slab, the earlier cess structure continued.
Under the new Bill, tobacco and related products will attract a 70% cess over and above 40% GST, while cigarettes will face a specific cess ranging from ₹2,700 to ₹11,000 per thousand sticks, depending on length.
Separately, the finance minister will also introduce the Health Security and National Security Cess Bill, 2025, which proposes a new cess on pan masala and possibly other products to be notified later. The cess will be linked to the production capacity of the machinery used, rather than the volume of goods manufactured.
The proceeds from the cess will be credited to the Consolidated Fund of India. After due appropriation by Parliament, the funds will be utilised for "meeting expenditure on the national security of India and for public health."