Centre Plans Higher Tobacco Taxes and New Pan Masala Cess as GST Compensation Ends

The Centre is set to introduce two new legislative bills to raise taxes on tobacco products and impose a fresh cess on pan masala as the GST compensation cess approaches its expiry. The Central Excise (Amendment) Bill, 2025 aims to increase excise duty on tobacco and related items to maintain overall tax incidence after the compensation cess ends. Meanwhile, the Health Security se National Security Cess Bill, 2025 will levy a new cess on pan masala and potentially other products to boost funding for national security and public health.

Under the new structure, tobacco products will continue to attract 40% GST but face significantly higher excise duties—ranging from 60–70% for unmanufactured tobacco to specific rates for cigarettes and cigars based on size and type. The new pan masala cess will be linked to the capacity of manufacturing units, with cess amounts varying based on production levels. These measures follow months of monitoring by GST officials and aim to curb tax evasion in the pan masala and gutkha sectors, long considered high-risk categories for leakage.

The GST compensation cess, originally meant to support states after GST’s rollout, is scheduled to end by March 2026 or sooner once pandemic-era loans are fully repaid. Despite earlier GST rate restructuring, cess on tobacco and pan masala was retained to service outstanding borrowings. With large repayments still underway, the new levies will ensure continued revenue generation while aligning with national priorities, including defence expenditure and public health initiatives.

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